Given this, the recent underperformance of some of the defensive names makes sense. It looks as if investors are starting to recognize that some of the more volatile companies are good long-term plays, and, at the same time, it’s possible to spend too much for a good night’s sleep.
So assuming cyclical sectors’ outperformance continues, how should investors consider playing this Great Rotation? Here are three ideas.
1.) Don’t completely abandon defensive sectors. Instead, investors should consider how much they’re paying for safety. In particular, the US utility sector looks quite overpriced and, despite its recent slide, probably has more downside. On the other hand, I currently advocate a benchmark weight to the healthcare sector.
2.) Consider the energy and technology sectors. Many of the cyclical sectors look cheap at today’s levels. In particular, current valuations of the technology and energy sectors represent good long-term values. These sectors are accessible through the iShares Dow Jones U.S. Technology Sector Index Fund (IYW) and the iShares Dow Jones U.S. Energy Sector Index Fund (IYE), respectively.
3.) Cast a wider net when looking for dividends. Part of the recent preference for defensive names has really been a preference for dividends in a world characterized by low nominal and real interest rates. But I would encourage investors to cast a wide net in their search for income and to look at dividend-paying companies from outside the United States, many of which look quite attractive. One way to access such firms is through the iShares Dow Jones International Select Dividend Index Fund (IDV).
Russ Koesterich, CFA, is the iShares Global Chief Investment Strategist.