Should You Play These Overvalued Sector ETFs?

by: Zacks Funds

With the global market tottering on uncertainties over the Brexit referendum, speculation over the Fed's future course of actions, the Bank of Japan's imminent policies to handle the faltering economy and prolonged Chinese economic issues, investors must be keeping a hawk's eye on equity valuation.

This is because in volatile times like this, no one wants to pick a bad or overvalued bet which may crash as soon as bearish signs hit the shore of risk-on investments. People must be searching for quality or value stocks and ETFs that are likely to prove sturdier in tough times like this.

Since the start of 2016, the market has been edgy on global growth concerns and oil price woes. While a slew of solid U.S. economic data gave some short-term respite to investors, surprisingly downbeat job data for the month of May took some shine out of the glorious U.S. economic picture.

If this were not enough, the latest polls showing higher chances of Britain exiting the European Union completely spoiled the market momentum, compelling stocks to retreat. But investors should note that after so many hazards since the start of the year, the major indexes are still near their all-time highs and may tank if more downbeat developments crop up in the days to come.

Are All Overvalued Securities Worth a "No"?

Market crashes may spur quality and undervalued investing. But there are a few sectors which appear overvalued at the current level among the 16 sectors within the S&P 500, as classified under the Zacks methodology, but still have a room to run.

Below, we highlight those sectors and the related ETFs which may be played a little further.

Consumer Staples - Forward P/E 22.6 Current Year

The sector boasts a current-year P/E of 22.6 and next-year P/E of 20.6, as per the Zacks Earnings Trends issued on May 25, 2016. This is way higher than the S&P 500's forward P/E of 18.2 for the current year and 16.1 for the next year.

The consumer staples sector has been an area to watch lately, as markets are volatile, leading investors to bet big on defensive sectors. The sector enjoys a few benefits at this moment. Greater spending power in the wake of improving wage growth as well as still-low energy prices are helping the consumer staples segment.

Moreover, the sector offers a decent dividend yield, which is immensely needed in the present low-yield environment. As long as volatility levels rule the market, the consumer staples segment is likely to outperform. So, investors can have a look at the Vanguard Consumer Staples ETF (NYSEARCA:VDC), the Guggenheim S&P Equal Weight Consumer Staples ETF (NYSEARCA:RHS) and the PowerShares DWA Consumer Staples Momentum Portfolio ETF (NYSEARCA:PSL) for further gains.

Oil/ Energy

The oil/energy sector boasts a current-year P/E of 98.1 and next-year P/E of 30.2. But since the sector has just taken off on an easing supply glut and a favorable demand-supply balance, it deserves investors' attention for further gains. For this, investors may try the iShares U.S. Energy ETF (NYSEARCA:IYE), the John Hancock Multifactor Energy ETF (NYSEARCA:JHME) and the Vanguard Energy ETF (NYSEARCA:VDE).


This sector has a current-year P/E of 17.9 and next-year P/E of 17.1. Though the P/E is lower than that of the S&P 500 for the current year, it is above several other sectors.

Now, investors should note that utilities offer outsized payouts. Investors' hunger for high yield securities in the current low yield environment should goad this sector further. Also, the utilities sector is defensive in nature, which is why it should emerge as a winner in the market turmoil.

The PowerShares S&P SmallCap Utilities Portfolio ETF (NASDAQ:PSCU), the First Trust Utilities AlphaDEX ETF (NYSEARCA:FXU) and the Guggenheim S&P Equal Weight Utilities ETF (NYSEARCA:RYU) are some of the utilities ETFs that can be exercised further.

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