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Defensive ETFs Outperforming The Market

2016 has been a year filled with plenty of volatility and large scale moves. Markets have recovered well off their lows and investors are now reviewing stocks and ETFs that have outperformed the overall market. This examination better prepares investors for any storm that may hit the markets in the future. If the market pulls back, the ETFs that did well earlier in the year will more than likely continue to outperform the S&P 500. Investors will look to hide in these ETFs until they feel like the weather is clear and economic certainty is better known. I wanted to examine a couple ETFs that have outperformed the S&P and will continue to do so if the market has another setback. These ETFs won’t be fully immune to a market pullback, but they will do better than most if the lows of the year are tested once again. In addition to the sector ETFs, I wanted to examine some top ranked stocks that might move with the ETF. The individual stock provides an opportunity for an investor who would want a bit more risk/reward. The Utilities Select Sector SPDR ETF (NYSEARCA: XLU ) seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Utilities Select Sector Index. Utilities are considered a safe place in times of uncertainty. The water, lights and the heat will be the last cuts a consumer makes if a recession hits. This certainty of cash flow makes utilities an attractive play. The dividend also makes utility stocks attractive because of the current atmosphere of low interest rates. The ETF has an expense ratio of .14% and is up almost 7% on the year. It sports a 3.4% dividend and has a P/E of 16. The biggest holding in XLU, with an 8.90% weighting, is NextEra Energy (NYSE: NEE ), a Zacks Ranked #3(Hold). Those looking for individual names might hold off on NextEra and instead look to RWE AG ( OTCPK:RWEOY ), a Zacks Ranked #1(Strong Buy). RWE is active in the generation and transmission of electricity and gas. The company is also active in the water business and is one of Europe’s five largest utilities. The company sports Zacks Style Scores of “A” in Value and Momentum and pays a dividend of 6.71%. The company has a $7 billion market cap and is seeing estimates being taken higher for fiscal year 2016. Over the last 90 days, estimates have been revised 8% higher, from $.091 to $0.99. The Consumer Staples Select Sector SPDR ETF (NYSEARCA: XLP ) seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Consumer Staples Select Sector Index. Consumer staples are companies that make products that people will buy no matter what. Think toothpaste, food, drugs, beverages and other household items. Stocks in this sector will typically outperform in weak markets due to the constant strength of demand of their products. The biggest holding in XLP is Proctor and Gamble (NYSE: PG ) with a 12% weighting. The stock has a Zacks Rank #4(Sell) so if looking for an individual name, it might be best to look at Clorox (NYSE: CLX ), which has a Zacks Rank #2 (Buy). Clorox has a $16 billion market cap with a forward P/E of 25. The company pays a 2.45% dividend and expects EPS growth of 7.34%. Over the last two months, estimates for the current year are rising up 1.1% from $4.85 to $4.91. The SPDR Gold Trust ETF (NYSEARCA: GLD ) seeks to reflect the performance of the price of gold bullion. The Trust holds gold bars and from time to time, issues baskets in exchange for deposits of gold and distributes gold in connection with redemptions of baskets. Gold has had a nice run over the last three months and has held up as the market has rallied. GLD reflected that with an 18% move higher. Gold and gold ETFs are looked at as safe havens for uncertainty, and the fact that they have held up tells investors that 2016 might see some rough waters ahead. There are no individual holdings of stocks in GLD. If investors are interested in gold stocks, they should look to the miners as a way to benefit from rising gold prices. Looking at the chart below, we see how gold has performed against the S&P 500 over the past three months. The iPath S&P 500 VIX ST Futures ETN (NYSEARCA: VXX ) is an ETN that is designed to provide investors with exposure to the VIX. The VIX is commonly referred to as the fear gauge and will shoot higher when the market sells off. Just like GLD there are no individual stocks held within the ETN, but rather it offers exposure to a daily rolling long position in the first and second month VIX futures contracts and reflects the implied volatility of the S&P 500. In Summary Investors should be positioning themselves for another pullback at some point this year. The defensive sector ETFs offer a way to stay invested and outperform the market. The fear ETF plays of gold and the VIX offer investors a way to play offense in a defensive market. Original Post Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

Dual ETF Momentum March Update

Scott’s Investments provides a free “Dual ETF Momentum” spreadsheet which was originally created in February 2013. The strategy was inspired by a paper written by Gary Antonacci and available on Optimal Momentum. Antonacci’s book, Dual Momentum Investing: An Innovative Strategy for Higher Returns with Lower Risk , also details Dual Momentum as a total portfolio strategy. My Dual ETF Momentum spreadsheet is available here and the objective is to track four pairs of ETFs and provide an “Invested” signal for the ETF in each pair with the highest relative momentum. Invested signals also require positive absolute momentum, hence the term “Dual Momentum”. Relative momentum is gauged by the 12 month total returns of each ETF. The 12 month total returns of each ETF is also compared to a short-term Treasury ETF (a “cash” filter) in the form of the iShares Barclays 1-3 Treasury Bond ETF (NYSEARCA: SHY ). In order to have an “Invested” signal the ETF with the highest relative strength must also have 12-month total returns greater than the 12-month total returns of SHY. This is the absolute momentum filter which is detailed in depth by Antonacci, and has historically helped increase risk-adjusted returns. An “average” return signal for each ETF is also available on the spreadsheet. The concept is the same as the 12-month relative momentum. However, the “average” return signal uses the average of the past 3, 6, and 12 (“3/6/12″) month total returns for each ETF. The “invested” signal is based on the ETF with the highest relative momentum for the past 3, 6 and 12 months. The ETF with the highest average relative strength must also have an average 3/6/12 total returns greater than the 3/6/12 total returns of the cash ETF. Portfolio123 was used to test a similar strategy using the same portfolios and combined momentum score (“3/6/12″). The test results were posted in the 2013 Year in Review and the January 2015 Update . Below are the four portfolios along with current signals: Return Data Provided by Finviz Click to enlarge As an added bonus, the spreadsheet also has four additional sheets using a dual momentum strategy with broker specific commission-free ETFs for TD Ameritrade, Charles Schwab, Fidelity, and Vanguard. It is important to note that each broker may have additional trade restrictions and the terms of their commission-free ETFs could change in the future. Disclosures: None

The Fox And The Hedgehog

“The fox knows many things while the hedgehog knows one big thing.” Click to enlarge Photo: Jeremy P. Gray The Greek poet Archilocus noticed this almost 3,000 years ago. We often see two different types of people. Some people go everywhere and study everything – pursuing contradictory ideas. They’re eclectic, diffused, and omnivorous. On the other side are souls who pursue a singular, unitary vision, an all-embracing organizing principle that gives the world coherence. We see this all around us. In literature, Dante was a hedgehog: he wanted to give the world a great poem about heaven and hell. Shakespeare, on the other hand, was a fox. He wrote plays about everything and everybody. In history, George Washington was a hedgehog – with the simple idea of American greatness – while Thomas Jefferson was a fox. And in modern life, outstanding business leaders are hedgehogs: think of Steve Jobs with his focus on design and functionality. And superior investors are often foxes: Warren Buffett, Peter Lynch, John Templeton. Both approaches are necessary. In business, a company needs a singular vision to cut through the clutter and make the main thing the main thing. It’s too easy to get distracted by the crisis of the day and never spend time or energy on what’s crucial. Hedgehogs get things done and keep their teams focused. But with investing, foxes rule. A portfolio needs to be diversified, limiting its exposure to any single area – reducing risk – while spreading its assets among an array of industries that generate new products and ideas – improving return. Investors need to be fox-like and flexible. And they have to be interested in everything, from genomic sequencing to quantum computing to chain-store sales to bitcoins and block chains. Investors should leave no stone unturned when searching for value. Foxes and hedgehogs each have an important role to play. A lot of times, they end up married to each other. Which one are you?