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Where to Safely Invest? ETFs to Help Weather Rough Markets

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On Friday, investors were only soothed somewhat by a better-than-expected U.S. jobs report, and the markets remained volatile following Thursday’s big selloff. But on Monday, global stocks dropped sharply after S&P’s downgrade Friday evening, and this has added urgency to concerns about domestic and global economic trends, including a deepening financial crisis in Europe.

Before Thursday’s 4.3% decline in the Dow and 4.8% in the S&P 500, investors pulled $75.5 billion from U.S. mutual funds and ETFs for the week ending Wednesday, according to a Lipper report released early Friday; equity funds posted outflows of roughly $7.5 billion — their largest weekly outflow since mid-August 2010. Nearly half of these outflows were attributed to the SPDR S&P 500 ETF which pushed out $3.5 billion for the week. 

Morningstar ETF analyst Tim Strauts shared some specific ideas on how investors can best navigate the current environment late Thursday in an online broadcast. Among the exchange-traded funds he suggests for defensive moves as well as opportunistic plays are the Energy Select Sector SPDR, the Utilities Select Sector SPDR and the Health Care Select Sector SPDR.

“When you’re looking at a defensive hedge right now, there are not too many places to hide,” Strauts said in a discussion led by Christine Benz, director of personal finance for Morningstar. “But there are two areas you could look at right now. One is in gold, and in that space we like iShares Gold IAU.”

The analyst acknowledges that gold is quite pricey, at about $1,600 an ounce, which is near record levels.  

Defensive-Play ETFs

When it comes to defensive sectors, Strauts points to utilities. “That sector has always become the number-one place people go to during these kind of panic times,” he said.

Thanks to dividends, the Select Sector Utilities Index (XLU) has a  yield of more than 4%, the analyst says, “which in this environment is pretty attractive.”

In health care, he likes the Select Sector Healthcare Index (XLV). Though he acknowledges that possible Medicare cuts could affect the group, “It’s still a defensive sector, and in a bear market, it should outperform the S&P 500,” Strauts shared.

Lastly, he points to dividend-index products, such as the iShares High Dividend Equity Fund (HDV), which doesn’t include much exposure to the financial sector as some other high-yield index strategies do.

For those looking for opportunities, Strauts suggests a large-cap value play, like the iShares Russell 1000 (IWD) or the Select Sector Energy Index (XLE).

“Overall, you want to try to stick to large-cap investments in a higher-volatility environment,” he said. “The small caps, well, which have had a great run during the last few years, are going to be much more volatile. In the last few days, [we’ve] seen the small caps drawn down a lot more than the large-cap stocks.”   


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