Scalper1 News
On a peak to trough basis, utilities have underperformed the S&P 500 and Dow Jones Industrial Average in 2015. XLU fell 56.87% and 49.66% during each of the last two bear markets. It’s not worth the extra yield to buy something with as much risk to principal as utilities stocks. In my recent article, ” The Fed Might Do Something It Hasn’t Done In 28 Years ,” I dispelled a myth concerning the labor force participation rate that’s been floating around the financial world. Today, I turn my attention to dispelling another myth: that utilities stocks are a safe-haven investment. For some strange reason, utilities have gained a reputation for being a safe-haven during turbulent times. Perhaps that was true in the distant past. But in today’s world, it couldn’t be further from the truth. As volatility picked up in recent weeks, it wouldn’t surprise me if many investors in the Seeking Alpha community dumped some money in utilities, under the assumption that a nearly 4% yield and reliable cash flows will protect you from a potential bear market. For those investors and anyone else considering parking money in Wall Street’s notorious safe haven, the chart below might make you cringe. (click to enlarge) As you can see on the monthly chart, during each of the past two bear markets, the Utilities Select Sector SPDR Fund (NYSEARCA: XLU ), an ETF that serves as a proxy for the utilities sector, was absolutely destroyed. During the 2000 to 2002 bear market, XLU declined 56.87%. That decline was worse than the S&P 500’s (NYSEARCA: SPY ) 50.51% drop and worse than the Dow Jones Industrial Average’s (NYSEARCA: DIA ) 38.75% fall. Although XLU managed to outperform the S&P 500 and the Dow during the 2007 to 2009 bear market, it still fell 49.66% peak to trough. I can’t imagine any investor thinking a 50% drop would qualify something as a safe haven, even if that security pays a couple of percentage points more in dividends than do funds tracking the major market averages. What’s happened so far in 2015? Once again, XLU is underperforming the Dow and the S&P 500. The peak to trough declines for XLU are 17.66%, while the Dow pulled back 16.24% and the S&P 500 fell 12.54%. Unlike a bond, which matures at par, there is no contractual obligation ensuring XLU will ever return to the level at which you bought it. I realize that in today’s low interest rate environment, investors who are desperate for income may be tempted to buy utilities for the 3.79% SEC yield XLU currently sports. I’d rather make 0% in a deposit account or 3%+ in any number of individual corporate bonds, than assume the substantial risk to principal that utilities have shown in recent bear markets. Yes, I realize that during smaller bull market corrections, utilities have shown themselves to be outperformers. But who needs “safe havens” in bull markets? It’s the bear market safe havens that are valuable. And utilities, in this millennium, have been anything but a bear market safe haven. Just because everyone repeats something over and over, doesn’t mean that thing is necessarily true. An investment with substantial risk to your principal is not a safe haven, no matter how many pundits claim it is. Disclosure: I am/we are long SPY. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Scalper1 News
Scalper1 News