Increased Exposure to a Risk-Off Sector Warranted

By Todd Rosenbluth, CFRA

Citing the risk-off mood of the market, CFRA’s Investment Policy Committee (IPC) took a slightly defensive tilt to its recommended sector allocation. CFRA raised the utilities sector to Overweight from Marketweight and lowered the industrials sector to Marketweight from Overweight. The utilities sector joins energy and information technology as favored sectors from a top-down perspective.

Utilities Select Sector SPDR (XLU 54 Overweight) tracks the S&P 500 utilities stocks on a market-cap weighted basis. CFRA’s Overweight rating for the ETF is driven by our Buy or Strong Buy recommendation on the seven largest holdings, including DUK, EXC, NEE and SO, as well as our low qualitative risk assessment of the portfolio. XLU charges a modest 0.13% expense ratio and trades more than 21 million shares daily, with a penny bid/ask spread.

Meanwhile, Vanguard Utilities Index ETF (VPU 120 Overweight) also earns a top CFRA rating, despite the portfolio being different. VPU tracks an MSCI utilities index and has more than 70 stocks, double the number in XLU, with small- and mid-caps included. The fund still holds hefty positions in DUK, EXC, NEE and SO, but this is diversified with moderate stakes in BKH, NJR, SJI and other stocks CFRA views favorably from a valuation and risk perspective. Though the expense ratio for VPU is lower than it is for XLU, at 0.10%, this ETF trades just 180,000 shares daily and with a wider bid/ask spread.

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