After a wild October, one that saw the S&P 500 notch one of its worst October performances ever, equity market volatility remains a concern for investors. Stocks rallied following the midterm elections, but the S&P 500 quickly gave back those gains and is currently saddled with a month-to-date loss, suggesting some of that October volatility is seeping into November.
Broadly speaking, fixed-income market observers believe it is all but certain that the Federal Reserve will proceed with its fourth interest rate hike of 2018 in December. Despite that, some investors are finding comfort in low-volatility stocks and exchange-traded funds (ETFs), such as real estate and utilities funds.
The Utilities Select Sector SPDR (NYSEARCA:XLU), the largest utilities ETF, is up around 2% since the start of November, confirming the notion that low-volatility strategies are working. Utilities ETFs and real estate funds are typically inversely correlated to rising Treasury yields, but recent price action in these products suggests investors are eschewing rate risk in favor of exposure to sectors that usually perform less poorly when markets swoon.
Here are some of the best options among real estate funds and utilities ETFs for conservative investors to consider over the near-term.
Fidelity MSCI Utilities ETF (FUTY)
Expense Ratio: 0.084% per year, or $8.40 on a $10,000 investment.
XLU may be the largest utilities ETF, but the Fidelity MSCI Utilities ETF (NYSEARCA:FUTY) is the utilities ETF with the lowest expense ratio. Like other large-cap, cap-weighted utilities ETFs, FUTY has held up well in recent weeks. The cheapest utilities ETF of them all is up 4% this month and resides just 2.8% below its 52-week high.
Compared to other sector funds, those are impressive technical traits. The $462 million FUTY tracks the MSCI USA IMI Utilities Index and holds 71 stocks. FUTY’s top 10 holdings combine for about half of the utilities ETF’s weight.
As is the case with other traditional utilities ETFs, there is an income proposition with FUTY, as the fund has a 12-month dividend yield of 3.14%. Year-to-date, FUTY’s annualized volatility is 120 basis points below that of the S&P 500.
Vanguard Real Estate ETF (VNQ)
Expense Ratio: 0.12%
Real estate investment trusts (REITs) and the related ETFs are also vulnerable to rising interest rates. That explains some of the struggles encountered by the Vanguard Real Estate ETF (NYSEARCA:VNQ) this year, but VNQ has been firming in recent weeks.
VNQ, the largest real estate ETF on the market, is up an impressive 6.52% in November and the fund is on the cusp of reclaiming all of its losses incurred during a brutal September. This Vanguard fund is a favorite among cost-conscious income investors because with an annual fee of just 0.12%, VNQ’s expenses are 90% cheaper than the average cost of competing strategies, according to Vanguard data.
As is the case with many traditional REIT ETFs, VNQ delivers on the income front with a trailing 12-month dividend yield of 4.4%.
SPDR Dow Jones International Real Estate ETF (RWX)
Expense Ratio: 0.59%
REITs are often thought of as a conservative asset class, but there are ways for risk-tolerant investors to add some excitement to the trade. International REIT ETFs, including the SPDR Dow Jones International Real Estate ETF (NYSEARCA:RWX), can do just that.
However, this idea comes with some caveats.
As has been widely documented, international stocks are struggling this year and REITs are not immune to that trend as highlighted by a year-to-date decline of about 9% for RWX. RWX’s geographic exposure includes a mix of 19 developed and emerging markets. Japan and Australia combine for almost 40%.
Those geographic exposures are relevant for multiple reasons. First, neither Australia nor Japan appear likely to raise interest rates anytime soon, keeping rate pressure off local REITs. Second, Japanese stocks remain attractive relative to other developed markets, including the U.S.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Expense Ratio: 0.3%
The Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD) is neither a utilities ETF nor a REIT fund, but it does feature hefty allocations to those sectors with low volatility and dividend kickers.
The $2.65 billion SPHD tracks the S&P 500 Low Volatility High Dividend Index, a collection of the S&P 500 stocks with the lowest trailing 12-month volatility and the highest dividend yields. Given those qualifiers, it is not surprising that SPHD’s two largest sector weights are utilities and real estate. Those group’s combine for over 38% of the fund’s roster.
SPHD has also been steady this month, gaining more than 2%. Investors are embracing this low volatility dividend fund. Over the past month, nearly $39 million in new assets have flowed into SPHD, according to issuer data.
Invesco DWA Utilities Momentum ETF (PUI)
Expense Ratio: 0.6%
The momentum factor and the utilities sector are rarely mentioned in the same breath, but the Invesco DWA Utilities Momentum ETF (NASDAQ:PUI) is an example of a utilities ETF that marries those two concepts. Price action confirms that this utilities ETF’s methodology is working.
This month, PUI is up more than 4%, extending its year-to-date gain to north of 7%. That is enough to make PUI one of this year’s best-performing utilities ETFs. PUI holds 31 stocks and follows the Dorsey Wright Utilities Technical Leaders Index.
That index “is designed to identify companies that are showing relative strength (momentum), and is composed of at least 30 securities from the NASDAQ US Benchmark Index,” according to Invesco. “Relative strength is the measurement of a security’s performance in a given universe over time as compared to the performance of all other securities in that universe.”
iShares Residential Real Estate ETF (REZ)
Expense Ratio: 0.48%
Don’t let the name fool you. The iShares Residential Real Estate ETF (NYSEARCA:REZ) is not focused on homebuilders stocks, and that is a good thing at a time when that sector is slumping. Rather, REZ delivers exposure to U.S. residential, healthcare and self-storage REITs. The residential component of this REIT ETF is primarily devoted to apartment building developers.
The sub-industry mix featured in REZ is proving favorable as the REIT fund is up more than 7% year-to-date. Due in large part to the aging U.S. population, healthcare REITs are expected to be one of the best-performing corners of the real estate sector in the coming years. REZ is poised to benefit from that trend with a 34.16% weight to those REITs.
REZ also eschews exposure to retail REITs, which are increasingly vulnerable to the shift away from mall and brick-and-mortar shopping to e-commerce venues. The fund has a three-year standard deviation of 13.6%, which is mostly inline with the category average.
iShares Global Utilities ETF (JXI)
Expense Ratio: 0.47%
Considering that markets outside the U.S. are scuffling, the iShares Global Utilities ETF (NYSEARCA:JXI) has been a pleasant surprise among utilities ETFs this year, gaining almost 4.7%. Global ETFs can and do include exposure to U.S. equities, and that is the case with this utilities ETF, which devotes 61.66% of its weight to domestic utilities.
Eight other countries, including the U.K., Spain and France, are represented on JXI’s roster. Even with its exposure to ex-U.S. markets, JXI’s standard deviation of 11.21% compares favorably with domestic utilities ETFs and broader equity benchmarks. Even with its largest weight to U.S. utilities stocks, investors should expect that JXI’s annual returns, particularly over lengthy holdings, will vary significantly fro, utilities ETFs like FUTY and XLU.
As of this writing, Todd Shriber owned shares of SPHD.