4 Sector ETFs for an Overextended Market

For most investors, the typical rules of investing have been shattered. You may be astonished at the rise of stocks and ETFs since the market’s March 9 low. If you believe the market may be overextended, there are some ways to play it.

The stock market cycle typically runs ahead of the economic cycle and in the markets, sectors typically gain ground at uneven paces. Over this past uptrend, some sectors are performing as one would expect. Others, such as industrials and metals, are surprising investors. Those areas tend to recover in the latter stages, states Mitchell Corwin of Morningstar.

Some investors think that the markets are overextended. If you’re one of them, here are four sectors that Corwin suggests you keep an eye on:

• Exploration and production of oil and natural gas, which can be accessed through the iShares Dow Jones U.S. Oil & Gas Exploration & Production (IEO). It’s up 15.9% year-to-date. A surging economy could propel the fund, but Corwin also feels that demand from growing economies could push oil prices even further.

• Health care, which one can grab exposure to through the iShares S&P Global Healthcare (IXJ). It’s up 4.5% year-to-date. The fund is a portfolio of some of the world’s best health care companies. Pharmaceuticals are a major portion of IXJ.

• Medical equipment manufacturers and producers can be found through the utilization of the iShares Dow Jones U.S. Medical Devices (IHI) which is up 24.3% year-to-date. Demand for medical equipment tends to be steady through economic cycles. There’s also a population here that’s aging, while overseas populations are booming.

• Consumer staples ETFs hold companies which offer goods that are viewed as essential. These companies can be accessed through the Consumer Staples Select Sector SPDR (XLP) which is up 4.5% year-to-date. One caution in this area is that consumers are increasingly shifting to generic brands, which could hurt name-brand staples.

Forecasts and predictions are just that. Always have a strategy before getting into a fund, such as a 200-day moving average strategy. You can read more about the strategy in The ETF Trend Following Playbook, as well.

Kevin Grewal contributed to this article.

Comments

[Alan Young:]

If the market is overextended, and you expect it to start going down, then you should be in cash, or short. When is the last time you saw some sectors go up (enough to justify the risk) when the rest were going down?

Sep 07 03:59 AM

[Jeff Diercks:]

When money starts to head to these sectors, its time to head for the hills. It is a warning that a correction is coming as those institutions that must be long move to defensive names.

I agree with Alan, when this happens it is better to step aside or move to the short side of the ledger depending on the market internals.

Sep 08 04:30 PM