“From Contrarian Outlook: There’s one income-producing sector you probably hold in your portfolio–and you may be wondering why it’s crashing out this year.”
“I’m talking about utilities, which are famous for their rock-steady dividends (and predictable dividend hikes). These companies literally power the economy. But if utilities are so important, why are they in the toilet while the rest of the market is on fire?”
Read the full article at ETF Daily News right here: Utilities Pullback Provides Good Income Entry Point (XLU)
As most portfolio managers know, building a broadly diversified portfolio has one key building block. Low or negatively correlated assets. Ideally, if each of these building blocks has low correlation to the others, one or more will be falling in value while the others are going up in value. This ideal scenario lends itself to arbitrage opportunities and the ability to buy assets when the market has placed them ‘on-sale’. With that said, have you considered diversifying a portion of your portfolio into the Utilities sector? If you want low correlated assets in your portfolio, I would suggest considering the Utilities sector. The utilities sector has maintained a very low correlation to the U.S. Stock Market over the last 19 years, at just 0.39. I wrote more in depth about this low correlation phenomena right here: Which Equity Asset Class has the Lowest Correlation to the U.S. Stock Market?
Utilities Sector Correlation to U.S. Markets January 1999 – December 2017
Source: Portfolio Visualizer
It’s been a very long time since we last accumulated Utilities sector equities. But, they’ve finally started to show some weakness. We prefer the Guggenheim S&P 500® Equal Weight Utilities ETF (RYU : $RYU) in this sector. Folks, you’ve gotta buy this stuff when it’s on sale. You can read why we invest in the Utilities sector right here: Which Equity Asset Class has the Lowest Correlation to the U.S. Stock Market?
When building a diversified portfolio of equities, one of the most important considerations is the correlation coefficient of the individual components in the portfolio. It just wouldn’t make sense to build a portfolio with several different assets that always go up and down simultaneously. If all the components of the portfolio are moving in tandem, there will be few opportunities to take advantage of the arbitrage benefits of re-balancing. And, if all the components of your portfolio are walking in lockstep with each other, why bother with diversifying into multiple funds, why not just buy a Total Stock Market fund or a Total World Equity index fund and leave all these re-balancing shenanigans alone?
There are several well-known equity asset classes that portfolio managers use to try and take advantage of diversification and low correlation. You probably have a few of these assets on your mind now, or at least in your portfolio. Which one do you think has the least correlation to the U.S. Stock Market?
- Is it Emerging Markets?
- Is it REITs (Real Estate Investment Trusts)?
- Is it Consumer Staples?
- Is it International Value Stocks?
- Is it Small Cap Stocks?
- Is it Large Cap Value Stocks?
- Or, could it possible be the frequently neglected Utilities Sector?
Utilities seem to be holding up quite well even with the threat of interest rate hikes. We sold a few shares of the Guggenheim S&P 500® Equal Weight Utilities ETF (RYU : $RYU). I don’t foresee any problems in the Utilities sector at this time; we’re just trimming some fat off this position. Price paid $74.89. Price sold $90.63. I wrote about Utilities ETFs in this article: How To Select the Best in Class ETF