The S&P 500 rose to a five-year high this week and investors continue to shovel cash into equity mutual funds. U.S. stocks are off to a great start in 2013 but some are worried overbought conditions could trigger a pullback.
Investors can take a look at some sector ETFs to stay in the market, but with a more defensive posture.
" I haven't seen readings this overbought since early 2011. If you remember, we made new highs in April, then waffled around at the highs into July and then promptly dropped 20% from intraday peak to intraday low in October," Teeka Tiwari for ETF Editor wrote.
The utilities sector is a classic defensive play. People need utilities no matter what cycle the economy is in, plus many of these companies pay out a decent dividend. The Utilities Select Sector SPDR (XLU) has a 4.14% yield and the sector is low-volatility all around. Take note, should the stock market run up, returns from a sector such as this will not be as impressive.
The commodity sector is not traditionally a defensive play, however, the PowerShares DB Agriculture (DBA) is a safe haven type play on the food sub-sector. Prices of cocoa, cattle, corn, soybeans, wheat and sugar are all included in this ETF. The idea of using a commodity play as defense is that the sector is generally uncorrelated to the equity market, giving a portfolio proper diversification.
The healthcare sector is another traditional safe haven play, and funds such as the iShares Dow Jones Healthcare Sector (IYH) have fared well over the recent Obamacare litigation. The patent cliff that big pharma has been trailing off has also paved the way for other drug companies to profit in the coming years.
Utilities Select Sector SPDR
Tisha Guerrero contributed to this article.