Defensive ETFs for a Market Pullback
March 15th, 2012 at 9:00am by Tom Lydon
The equities market and stock exchange traded funds are in the midst of a robust rebound, and the bears are growing louder in their predictions of another correction. With the major broad market indices returning to pre-financial crisis levels, it may be safer to keep some defensive ETF picks on hand.
Adam Parker, U.S. Equity Strategist at Morgan Stanley and the most accurate market forecaster for 2011, believes that “risk aversion” is making a comeback for the second half and into 2013, reports Matt Nesto for Yahoo! News.
“We think the risk-reward is skewed to the negative as the year unfolds,” Parker said in an interview on Breakout.
“Timing is everything,” Parker added. “Cyclicals had really become cheap relative to defensives but they’ve really snapped back.” [Sector Rotation Favors Riskier ETFs]
Parker projects a year-end S&P 500 target of 1167, or a 19.6% drop off Tuesday’s close.
Investors looking for defensive positions should consider SPDR Utilities Select Sector Fund ETF (NYSEArca: XLU) and SPDR Health Care Select Sector Fund ETF (NYSEArca: XLV), since they deliver “more achievable estimates, higher cash balacnes, higher dividends,” Parker advises.
The defensive utilities ETF XLU gained 14.3% over 2011 as investors sought safety from the heightened market volatility, but it is down 1.1% year-to-date after investors turned back to riskier equity plays. However, XLU gained 1.5% over the past week as the S&P 500 hit new highs.
Additionally, he categorizes SPDR Technology Select Sector Fund ETF (NYSEArca: XLK) as a defensive play because of the tech stocks’ low betas – volatility, high cash balances and valuations given their growth.
Parker, though, does not favor traditional defensive plays like the SPDR Consumer Staples Select Sector Fund ETF (NYSEArca: XLP) or iShares Dow Jones U.S. Telecommunications Index Fund ETF (NYSEArca: IYZ).
“Given the high oil price, staples tend to have more exposure to rising commodities,” Parker said. Slowdowns would also translate to “more risk to Telecom dividends than regulated Utilities.”
Utilities Select Sector SPDR
For more information on sector plays, visit our sector ETFs category.
Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.