SET Portfolio Update February 2017

Sector Spotlight: 

The Case For Utility Stocks

 Every month we advise a hold on XLU, the Utilities Select Sector SPDR.  

Why?

It performs month after month, year after year, as a solid source of income.  This long-term view of utility stocks drove our decision to hang onto the Utilities Select Sector SPDR Fund when it started to slide last year.

Late summer and fall were rough times for utility stocks.  Look at what happened…

The ETF plunged by 12.7% in four and a half months.  On June 22, it closed at $52.76, and on November 11 it closed at $46.03.

The top five stocks tracked by the ETF represent more than 38% of its assets, so this is not a broadly diversified investment.  Swings in the prices of individual stocks, such as NextEra Energy (NEE), Duke Energy (DUK), and Southern Company (SO) can significantly impact the price of the ETF.

So where are utility stocks heading overall and how can we expect these bellwether stocks to perform?

It’s a mixed bag.  Major utilities such as Exelon (EXC) are forecasting mediocre results.  NextEra (NEE) is expecting more rapid growth with its focus on renewable energy sources.

The search for safety and income will probably always lead investors to the door of utility stocks.  We can expect pullbacks when enthusiasm for the sector pushes prices to lofty levels, as we saw last summer.

Another possible scenario… growing jitters with junk bonds could encourage high yield investors to exit positions in ETFs such as SPDR Barclays Capital High Yield Bond ETF (JNK) and move into utilities.

But no matter what the short-term moves might be, we see the Utilities Select Sector SPDR (XLU) continuing to perform much as it has over the past 18 years.  Long stretches of gradual growth punctured by steep setbacks.

2001 and 2002 were rugged years for utility stocks, as the market continued to digest the dotcom bubble.  Another setback came with the financial crisis in 2008.

The current yield is 3.37%.  YTD the ETF is up 1.26%.

The Utilities Select Sector SPDR (XLU) will continue to be a core holding in our portfolio.  Investors who do not need the income, and can afford to reinvest dividends, will be particularly well rewarded.

 

Portfolio Update

. . . . Vanguard Mid-Cap Index Fund Investor Shares (VIMSX) – HOLD

We marched into mid-caps a few weeks ago and so far the results have been modest.  The ETF has edged up over our buy up to price of $37.50.  Monitor and buy on possible dips. 

. . . .  SPDR S&P Pharmaceuticals ETF (XPH) – HOLD 

As uncertainty keeps swirls around the specific policies of the Affordable Health Care Act, the SPDR S&P Pharmaceuticals ETF will continue to edge up and down.

A typical headline we recently noted: “Drug Stocks Dip After Spicer Affirms Trump’s Stance On Cutting Costs.” 

. . . . Vanguard REIT ETF (VNQ) – HOLD 

The past few weeks have been good ones.  We are happy to hold.  Current yield is 4.82%. 

. . . . PowerShares Dividend Achievers (PFM) – HOLD 

As with the REIT ETF, a nice uptick for the Dividend Achievers over the past two weeks.  The yield has been steady at 2.55%. 

. . . . First Trust ISE Global Engineering & Construction (FLM) – HOLD 

Trading has been choppy with ups, downs, and no clear trend.  Our long-term outlook remains positive.  YTD the ETF is up 2.78%.

. . . . Vanguard High Dividend Yield ETF (VYM) – HOLD

Even though markets have been rising, we appreciate the benefits of the lower volatility that dividend stocks typically deliver.  Current yield is 2.91%.

. . . . First Trust ISE-Revere Natural Gas Index Fund (FCG) – HOLD

Prices have been stuck in neutral.  We’ve seen trading in a relatively narrow range for the past two weeks.  Are rough times ahead?  Prices for the NYMEX futures contract hit a high in late December and have been sliding ever since.   We will hold and ride out the storm.

. . . . PowerShares S&P SmallCap Energy ETF (PSCE) – HOLD

In our last report, we noted that following a post-election surge, energy stocks are now struggling once again.  We are still in the black and we’ll hold, despite rumblings of more trouble ahead and possible surpluses in crude supplies.

. . . . Utilities Select Sector SPDR (XLU) – HOLD

See this month’s Sector Spotlight for our analysis.

Action to Take

• Move First Trust ISE-Revere Natural Gas Index Fund (FCG) from Buy to Hold

Category: SET Portfolio Updates