The Best Defensive Sector?

December 14, 2018  |  Michael Reilly

In recent weeks, it’s been impossible to escape the headlines surrounding the strained relationship between the United States and China regarding trade.

But today, I want to focus your attention on something the media has overlooked. Something investors may capitalize on…

For the first time in more than two years,  November 11, 2016 to be exact, Utilities is ranked as one of the 4 strongest sectors on a Relative Strength basis. That’s no accident.

You can see how Utilities rank compared with other sectors in this illustration provided by Nasdaq Dorsey Wright.

Why is this important to you? Because volumes of Relative Strength studies all come to the same conclusion: consistently allocating investment dollars in the strongest sectors, while avoiding the weakest, can lead to outsized gains.

Editor’s note: For those of you invested in our relative strength models, the rise of Utilities means a major shift of holdings within many of our RS models.

For investors who are not currently invested in an RS model and would like additional information, there’s still time to explore the opportunities as we prepare for a new year. We invite you to schedule a short consultation with an advisor or CFP. Use these links to connect with us at or schedule a phone consultation.

Just four short months ago, on August 13, 2018, Utilities was ranked so low it wasn’t even a blip on the radar. In fact, it was ranked as low as 10 out of the 11 broad sectors we track.

As recently as October 18, 2018, Utilities was still considered weak – ranking no higher than #8… But here we are in the middle of December and the sector ranks 3rd!

Utilities ascent to the top in such a short time is practically meteoric.

This advance to the top may not be as cool as watching Tiger Woods regaining his winning ways on the world stage – but it’s still a pretty big deal.

And although the “why” isn’t as important to us as the “what,” it’s no coincidence that Utilities has risen dramatically over the last two months.

All the major market averages peaked recently, with the S&P 500 peaking on September 21, 2018.

The volatility that followed has sent the index reeling, testing both its February and April lows – making even the most seasoned investors think about heading for the exits.

And because Utilities is a defensive sector, it’s an area investors often shift assets towards when nervousness sets in.

So the move of investment capital to the Utilities sector likely has a lot to do with current market volatility.

Should volatility persist, defensive sectors like Utilities could continue to see improving prices as demand rises and dollars move out of risk-on assets in favor of areas perceived as less volatile.

For investors searching for potential investment ideas in the Utilities sector – here are 5 funds currently ranked highly in our Utilities-based ETF matrix:

  • Invesco DWA Utilities Momentum Portfolio (PUI)
  • First Trust Utilities AlphaDEX Fund (FXU)
  • Vanguard Utilities ETF (VPU)
  • Fidelity MSCI Utilities Index ETF (FUTY)
  • iShares U.S. Utilities ETF (IDU)
  • Utilities Select Sector SPDR Fund (XLU)

But a word of caution: The love for any sector, even one with strong momentum, is dangerous. Momentum can change rapidly, as appetites for risk change based on new developments worldwide.

With market internals at such technically washed out and oversold levels, the idea of a late December Santa Claus rally isn’t out of the question.

If a rally were to develop, defensive sectors (including Utilities) could see demand falter in favor of risk-on assets.

So remember, in order to gain clarity of the true health and direction of the market, focus on market internals over market externals – the DOW, S&P 500 or NASDAQ.

Follow the strength. Demand is created by big institutional inflows of money, by the guys who can actually move the needle on the direction of the markets.

Always follow your investment rules – unemotionally. And adjust your portfolio accordingly.


Until next time,

Michael Reilly, CFP(R)

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