ETFdb Logo
ETFdb Logo
ETFdb Logo
ETFdb Logo
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • Entrepreneur ETF
    • Equity ETF
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Future ETFs
    • Gold & Silver Investing
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Modern Alpha
    • Multi-Asset
    • Multi-Factor
    • Nasdaq Investment Intelligence
    • Portfolio Strategies
    • Retirement Income
    • Smart Beta
    • Thematic Investing
    • Volatility Resource
  • Database
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
    • ETFs Future-Forward 2021: An iShares Investing Symposium
    • Three Themes for 2021: An iShares & MSCI Investing Symposium
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Videos & Podcasts
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Sector ETFs to Buy in a Lofty Market
News
Share

Sector ETFs to Buy in a Lofty Market

Justin KuepperSep 21, 2015
2015-09-21

The stock market may be overvalued based on price-earnings (P/E) ratios despite the recent correction sending many portfolios into the red. According to YCharts, the S&P 500’s cyclically adjusted price-earnings ratio stands at 24.34x, which is significantly greater than its long-term average of 16.63x (since January 1881). The ratio is approaching the levels seen leading up to the great depression and in the 1970s, although it remains below the 2000 dot-com bubble levels.

Y Charts S&P 500

Of course, P/E ratios aren’t always an apples-to-apples comparison over time. Technology stocks during the dot-com bubble weren’t capable of generating a profit in most cases, with investors buying based on arbitrary factors like page views. By comparison, the lofty valuations seen today are largely due to low interest rates that have encouraged financial engineering and margin buying, which ultimately boosted valuations.


Content continues below advertisement

Undervalued Sectors

Investors who agree that the market may be overvalued at its current levels may want to consider moving into more defensive equities. In other words, they may want to consider exchange-traded funds (ETFs) targeting industries at the lower end of the P/E spectrum rather than simply buying into all of the industries in the S&P 500. This kind of sector rotation strategy could help curb losses in the event of a large market correction.

According to GuruFocus, the most undervalued sectors include energy, utilities, and financial services, while the most overvalued sectors include real estate, health care, and communications. Some of these sector valuations, such as energy, should come as a surprise due to weakness in commodity prices or other fundamental factors. Others may simply be undervalued because of investors betting on growth elsewhere.

The most attractive opportunities in terms of valuation may be utilities and consumer defensive, trading with a P/E of 16.3x and 23.4x, respectively. While energy, financial services, and industrials may be cheaper in some ways, energy is suffering due to low crude oil prices, financial services are dependent on interest rates, and industrials are suffering from the high U.S. dollar valuation. All are areas dependent on externalities.

Utilities may be exposed to some of this interest rate risk since higher interest rates make their yields less attractive to investors. Many analysts agree that the sector has priced in the worst-case scenario. With interest rates remaining steady in September, it seems that this worst-case scenario is less likely to materialize. Utilities also rallied by 32% back in 2004 despite the Federal Reserve’s hiking of interest rates, compared to the S&P 500’s 8.2% rally.

ETF Strategies

There are many different strategies that ETF investors can use to position their portfolios more defensively in the lofty market.

The most straightforward strategy might be selling some broad market exposure and diverting the capital to sector ETFs in these areas such as the Utilities SPDR (XLU A) or the Consumer Staples Select Sector SPDR (XLP A). By doing so, investors are reducing their exposure to high P/E sectors of the economy and increasing their exposure to cheaper areas, with the goal of reducing volatility when P/E ratios and valuations begin to normalize.

A second option is investing in sector-rotation ETFs that already employ these kinds of strategies over time. While the ETFs in this space tend to be thinly traded, long-term investors less concerned with immediate liquidity may benefit. Some popular ETFs in the space include the Global X Sector Rotation Index ETF (SCTO B-) and the Barclays ETN Shiller CAPE (CAPE B+), both of which seek to invest in undervalued and sell overvalued sectors.

The Bottom Line

U.S. equity valuations appear lofty from a historical perspective, although the rationale for the high valuations is different than in the past. Investors looking to take a defensive approach within their portfolios may want to consider investing in undervalued sectors, like utilities or consumer defensive. There are a number of ETFs available to build this exposure, including sector ETFs and sector-rotation ETFs, although the latter carries the risk of illiquidity.

Image courtesy of Pong at FreeDigitalPhotos.net

» Popular Pages

  • Tickers
  • Articles

May 16

Steering Retirees Through the Great Resignation

May 16

ETF Leaders Powered by the NYSE: Darek Wojnar

May 16

Here are Morningstar’s Kapoor's Thoughts on Millennials

May 16

Palladium ETF Strengthens on Chances of Global Deficit

May 16

A Look at CLNR’s Investment Thesis

May 16

An Options Strategy for Current Turbulent Markets

May 16

Blockchain ETFs Head the Market Bounce

May 16

Midstream's Important Role in the Energy Transition

May 16

Does Your ESG Portfolio Identify Risks to Financials?

May 16

Electric Vehicles Gaining Market Shares, KARS Invests

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

ARKK

ARK Innovation ETF

XLE

Energy Select Sector SPDR...

WEAT

Teucrium Wheat Fund

VIG

Vanguard Dividend...

VGT

Vanguard Information...

VNQ

Vanguard Real Estate ETF

VYM

Vanguard High Dividend Yield...


Content continues below advertisement

Loading Articles...
Help & Info
  • Contact Us
  • About Us
  • Mission Statement
  • Press
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © ETF Flows LLC
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

Equity ETF Channel

Retirement Portfolio Redux: Is the 60%-40% Portfolio Dead?

Debbie CarlsonOct 22, 2020
2020-10-22

With the 10-year U.S. Treasury yield hovering below 1% and Federal Reserve Chairman Jerome Powell...

Equity ETF Channel

Portfolio Diversification Isn't Dead, It Was Just Sleeping

Debbie CarlsonOct 15, 2020
2020-10-15

Investors could be forgiven to think there was no reason to invest outside of the U.S. for the...

}
X