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, ETF Expert (591 clicks)
Bonds, dividend investing, ETF investing, long/short equity
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It's really tough to get excited about stock ETFs these days. Sure, we could talk about oversold indicators. We could talk about bear market lows in a historical context. And obviously, we could point to exceptionally low valuations on price/earnings, price/sales and price/cash flow.

Nevertheless, fear and greed move markets more than anything else. And it's not clear whether or not the big money (e.g., hedge funds,billion dollar money management firms, sovereign wealth funds, etc.) is finished selling into market strength.

That's why I continue to come back to volatility. We still have a situation where the markets can climb a phenomenal 3% up until the last 10 minutes of trading, then fall 450 points, and quickly recover 70 of those points in the final minute. In the end, a 3% gain becomes roughly a 1% loss.

Still, we journey forward, knowing that volatility is unsustainable at record high levels. The financial crisis will abate. The global recession will give more clues about the damage. Stock assets, as well as bond assets, will likely move higher, though a genuine uptrend will be orderly. (Bear market bounces are the ones that squeeze short-sellers and rise 9%-10% in a single session!)

Recognizing these probabilities, I've been looking at a variety of criteria that would make an ETF more attractive than others. For example, what if an ETF's beta (risk) were 20% lower than the market at large? What if the ETF in question had a dividend yield that was nearly twice that of most other sectors? What if its earnings yield were 2x that of a 10-year note?

And after screening for all that, what if, unlike the Nasdaq, Dow or S&P 500, this ETF did not break to new closing lows after October 10? October 10 is highly regarded as a possible "intra-day" bearish low for the market. But all of the major benchmarks have had a series of lower "actual" closing prices than they did on 10/10. Not this ETF!

Maybe you guessed, maybe you did not.  (You should have guessed... it's in the title!) In any event, I am talking about the SPDR Select Utilities Fund (NYSEARCA:XLU).

Utilities (XLU) has a beta of roughly .77, representing 20% less risk than the S&P 500. Its dividend of approx 4% is 2x the broader market. And its earnings yield at 8% is far more attractive than the 10-year treasury yield.

I am not suggesting that XLU can or will go higher without the asset class itself. Stocks are going to need to go up in order for XLU to progress.

Nevertheless, if you're thinking about nibbling...
If you've considered getting in roughly 10% off the possible 10/10 bottom...
If you want slightly less risk than buying the market outright...
If you appreciate being paid dividends while waiting for a storm to pass, and...
If you think an Obama presidency could result in economic stimulus heading towards infrastructure needs...

Then the SPDR Select Utilities Fund (XLU) might just be a good place to start.

Utilities etf 2008 oct


Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.
 

Source: Utilities ETF: Good Way to Dip Your Toe Back in the Market