by Marc Bastow | August 30, 2013 6:00 am
Telecom, consumer staples and utilities — they’re the safest of the safe, and are widely loved by cautious long-term investors.
However, all three have been hampered since mid-May, when the 10-year Treasury yield started to rise toward the 3% mark. High-yield and other defensive sectors were battered, and still remain somewhat weak as the 10-year sits around 2.7%.
Specifically, the Utilities SPDR (XLU), the Consumer Staples SPDR (XLP) and the Vanguard Telecommunications Services ETF (VOX) all posted negative returns in May, and are down a respective 6%, 5.9% and 3.4% since the middle of that month.
So is there any rebound potential in this bloody, battered group? We’ll take a look at each sector — and its representative ETF — and decide whether it’s worth jumping in at this point. (Though with a big caveat that any Fed decisions on its QE policy could have a huge impact on all three of these funds in the coming quarters.)
Expense Ratio: 0.18%
Beyond gold and commodities, I can’t imagine a more beaten-down sector.
The XLU counts Duke Power (DUK), Southern (SO) and Dominion (D) among its biggest holdings; all three have dividend yields of 4%-percent, but only Dominion is even posting a positive return over the past six months. XLU also has Exelon (EXC) as a top-five weighting — EXC cut its dividend in February, and earnings are on the way down.
In fact, analyst estimates for many of XLU’s top holdings show little hope for earnings growth. Meanwhile, the sector is still hampered by high costs, stagnant revenues and shrinking margins.
Utility bulls are few and far between. Louis Navellier just ripped the sector, and even I made a case back in late May that it had so many issues — including lower prices for electricity, higher operating costs for both electricity and nuclear facilities, and the growing demand for alternative sources of energy, such as solar power — that initiating a position anywhere was a mistake.
Farmers’ Almanac is predicting a harsh winter in the Northeast … though if the best the sector can hope for is cold weather, that’s a sign. My advice? Get out.
Expense Ratio: 0.14%
Telecom doesn’t mean what it used to: wires and poles and standardized pricing models for your service. It’s now all about wireless and Internet services, and mobile phones. For some, the model even includes delivering cable television and security services to your home, too.
Of course, these services act much like utilities, and the stocks resemble them too — growth is sparse in much of the sector, but dividend yields sure aren’t. Charles Sizemore, for one, points out that while telecom’s big payouts are still a lure for investors, they face a big problem in that they’re all chasing the same customer base.
The Vanguard Telecommunications Services ETF contains most of the names in the space, including Verizon (VZ), AT&T (T), Sprint and Century Link (CTL) — VZ, T and CTL all sport 4%-plus yields. VOX itself has managed to hold up all right during the past few months, and the slow (but existent) economic recovery should mean a few more customers for plans (and a few upgrades in plans), which could help spur growth.
One big consideration, though, is that while the VOX holds 33 stocks, almost half of it is weighted in just Verizon and AT&T, so you’re not getting a terribly diversified fund. The upside is that the pair share a virtual duopoly, so you don’t have to worry about either falling off the face of the earth and sending the fund into a tailspin.
Expense Ratio: 0.18%
Speaking of products and services that won’t go out of style any time soon, the XLP is the quintessential home for stuff we’ve been using for decades and will continue to consume for decades to come.
This is decidedly unsexy fodder such as shampoo, diapers, bread and beyond — but stuff we need day in, day out.
XLP’s top holdings are a who’s who of dividend stalwarts: Procter & Gamble (PG). Coca-Cola (KO). Philip Morris International (PM). Walmart (WMT). Most of these companies are at the very least deeply entrenched, and some even have decent growth prospects thanks to international sprawl. And not that anything in life is guaranteed, but dividend cuts are a distant worry in this group.
Ultimately, these stocks — and so by proxy, this ETF — are bulletproof long-term investments. Jim Woods points out that the XLP will “keep doing well if and when things get dicey,” and I couldn’t agree more. I think this is the long-term winner of the group.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he was long SO and VZ.
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