Strategies that have protected investors in past selloffs aren't doing so now. In a rising-rate environment (https://www.wsj.com/articles/some-investors-shun-longer-dated-bonds-as-duration-risk-rises-1518085831), investors need torethink where to seek shelter.
A selection of eight of the largest exchange-traded funds with strategies generally regarded as "defensive"--includingtwo so-called low volatility ETFs, four high-dividend or dividend-appreciation ETFs, a consumer-staples fund and autilities fund--have for the most part declined sharply over the past week.
Granted, they had slightly outperformed the market, declining by an average 7.3% over the period compared with an 8.5%decline in the S&P 500 through Thursday's close. But customers are unlikely to be satisfied with that kind ofperformance from products sold to them as safe. Strikingly, among the worst performers have been the so-called lowvolatility funds (https://www.wsj.com/articles/the-problem-with-low-vol-stock-funds-1465178521).
Consider BlackRock(BLK)'s iShares Minimum Volatility U.S. ETF, with $13.9 billion under management. It has fallen 7.8%in a week. That doesn't feel like "minimum volatility," regardless of what the broader market has done. Put simply,these funds aren't living up to their promise, letting investors down.
All these defensive funds have something in common--they tend to have high concentrations in sectors such as consumerstaples, utilities and other high-dividend payers. The individual stocks these funds invest in are viewed as "bond-like"by investors for their steady businesses and high, dependable dividend yields.
This style of investing generally does well during an economic downturn or a market panic. But it tends not to do sowell in a rising interest-rate environment. That is a problem at the moment because rising interest rates are a maincause of the current selloff.
When actual bonds start paying decent rates, the appeal of bond-like equities fades. Currently, with the 10-year U.S.Treasury yielding 2.83%, only three of the eight defensive ETFs now boast a higher yield.
If rates keep rising, this defense won't hold.
Write to Aaron Back at firstname.lastname@example.org (mailto:email@example.com)
-Aaron Back; 415-439-6400; AskNewswires@dowjones.com