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Utilities will play out the best during our next debt ceiling debate in January 2014.

Running the Numbers

We ran the numbers from our database of 545 companies to uncover which sector played out the best during the latest government shutdown and debt ceiling debate. Each company in every sector was calculated for weight (based on market cap), risk (standard deviation of returns), and overall return (beginning of the month compared to the end of the month). The risk and return of each sector, plotted below, illustrates relative amounts of volatility and returns over the last month while the Federal Government was shut down and debating the debt ceiling.

From: Newton Analytics

The Utilities sector stands out for having the highest return and the second lowest risk (standard deviation). All data and calculations were obtained from Newton Analytics.

Utility companies, in general, are low volatile companies that pay good dividends. Investors of the Utilities sector are typically looking for consistent returns from solid companies. The sector becomes a safe haven for investors during uncertain times because of its stability and steady income stream.

SectorDiv Yield
Healthcare1.01%
Services1.39%
Technology1.69%
Financial2.58%
Utilities3.81%
Basic Materials1.73%
Industrial Goods1.46%
Consumer Goods2.03%

Source: Newton Analytics

The table above shows each sector's current average dividend yield based on the 545 companies in our database. We find that the Utilities sector has the highest dividend yield over all other sectors which supports its defensive characteristics. The sector, primarily consisting of energy providers, has consistent demand for its products regardless of economic conditions. It is widely believed that consumer base will only grow as the countries energy demands increase with an expanding population.

The sector's relative stability stems from the non-discretionary nature of its products, widening consumer base, and large source of income.

What To Expect In January 2014

If history repeats itself over the debt ceiling, (like it has many times over) the markets will likely go through a similar disruption as experienced over the last month. The shutdown and debt ceiling debate caused a decline in the overall market (S&P500) of -4.8% (9/18/2013-10/9/2013). The same index quickly rebounded 5.3% from 10/9/2013 to 10/17/2013 as talks of resolution surfaced in the media (Newton Analytics).

The turbulence provided by the government created a buying opportunity for some investors, and instability for others.

So What To Do?

Though we generally do not give out short-term advice, it is apparent that the nation may face another debt ceiling debate and it will impact the markets. A short-term investor may consider a position in the Utilities sector as a defensive play come January. We like Utilities Select Sector SPDR (NYSEARCA:XLU) put out by State Street Global Advisors for three reasons:

  1. Expense Ratio: 0.18% (compared to the average Utility ETF of 0.46%). The expense ratio is the lowest in its class.
  2. Annual Turnover Ratio: 4.23% (compared to the average Utilities ETF of 20.3%). The annual turnover ratio represents the percent of the fund's assets that are traded for other investments on an average annual basis. Lower turnovers indicate management confidence in asset selection.
  3. Inception Date: 12/16/98 (State Street has ran this fund for 25 years). The average for the Utilities sector ETFs is ~8 years (Yahoo).

To Recap

  • There is a high probability of a similar debt ceiling debate that will cause turmoil in the markets
  • The Utilities sector had the second to least amount of volatility with the highest amount of returns out of any other sector because of its 'safe haven' fundamentals.
  • XLU has the most experience, most confident, and least cost in their ETF class (Utilities).

We believe that the Utilities sector will again be the least risk and highest return in January, based on the presented empirical evidence, should all else be equal.

Source: Low Risk, Best Return: Utilities Sector In January