Two Sector ETFs Offering Safety
Through the first two weeks of May the major indices are taking it on the chin as investors fear more trouble is brewing in Europe and will sell first and ask questions later. However, there are two sector ETFs that have been holding up much better than the overall market: SPDRs Consumer Staples ETF (NYSE: XLP) and the SPDRs Utilities ETF (NYSE: XLU).
Since the S&P 500 topped out on 4/23, the index is down 6.8% as XLU and XLP are down approximately 2% each. This is a major difference over a short period of time and something that should not be ignored.
The largest holding of XLP is Proctor & Gamble (NYSE: PG), probably the best one-stop stock that covers a large portion of the sector. The company is best known for its brands Crest, Downey, Bounty, Duracell, Gillette, and Pampers. The stock has been trading in a narrow range for the last six months between $60 and $65 for the majority of the time. Buying near $60 with the 3.1% dividend sounds like a solid long-term strategy. The number two and three holdings in the ETF are Wal-Mart (NYSE: WMT) and Philip Morris (NYSE: MO).
Within the utilities sector there are several sub-sectors with an array of stocks to choose from. The top holding in XLU is Southern Company (NYSE: SO), an electric company based in the Southeastern US, has held up well during the recent sell-off and pays a 5.3% dividend. A diversified utility that has underperformed the market and the sector is Exelon Corp (NYSE: EXC), a provider of power to Illinois and Southeastern Pennsylvania. The reason I find EXC attractive is due to its exposure to nuclear energy and its 5.0% dividend yield.
If you are not concerned about the recent pullback and feel the market will resume the uptrend in the near future, then the two sectors above are probably not your best choice. However, there is nothing wrong with adding a little diversification and hedging for a pullback.
