Defensive ETFs Are Surging Despite All-Time Highs In Stocks

Defensive ETFs Are Surging Despite All-Time Highs In Stocks

The strength of broad domestic stock market indices in 2017 has been the dominating story in global financial markets.  The expectation of new government policies, coupled with the lack of risk asset volatility, has many investors feeling confident in a continuation of the bullish trend.

As of last week, ETFs trading in the United States have accumulated over $75 billion in fresh capital inflows since the start of the year.  The majority of that money has gone towards stock-focused index funds such as the SPDR S&P 500 ETF (SPY).

The natural assumption is that the persistent grind higher in stocks will create a negative divergence for defensive assets like precious metals, bonds, and even volatility-linked investments.  These asset types are typically sold during periods of cyclical strength in equities as buyers step further out on the risk scale.   Nevertheless, many of the exchange-traded funds that track these defensive indexes are seeing stable or even surging strength since the start of the year.

One prime example of this counterintuitive price action is the SPDR Gold Shares ETF (GLD).  This well-known fund tracks the daily spot price of gold bullion and has gained just over 9% since the beginning of 2017.  That performance has surpassed the 6% gain in SPY over the same time frame.

Gold bullion is often considered a safe-haven asset class because of its physical nature and consideration of intrinsic value.  Some investors also view it to be an effective hedge against inflationary pressures as well.  No matter your investment outlook, it’s worth noting the surging price of gold and other precious metals as a counterbalance to the bullish enthusiasm in stocks.

Another defensive area of the market seeing a measure of turning momentum is high quality fixed-income.  Treasuries, investment grade corporate, mortgage, and municipal bonds have been under pressure since mid-2016 as rising interest rates negatively impact prices.  This has been a reasonable reaction in light of the protracted momentum behind growth stocks and expectations for future interest rate hikes by the Federal Reserve.

Nevertheless, there is a measure of consolidating and constructive price action in bonds that should not go unnoticed.  The iShares 20+ Year Treasury Bond ETF (TLT) has tilted into positive territory for the year and continues to show signs of near-term strength.

The fact that Treasuries and other investment grade bonds aren’t on their lows as stocks surge to new highs is indicative of some uncertainty.  Investors may be looking to hedge their risk exposure with high quality assets in the event stocks reverse course in the first half of the year.  It is also indicative of the continued demand for U.S.-denominated debt as a relative

Even within the stock market itself, there is a new-found interest in utility and consumer staples companies.  These two sectors often demonstrate safe-haven tendencies and are historically less volatile than the broad market during periods of turmoil.

The Utility Select Sector SPDR ETF (XLU) has surged over 4% in the month of February alone.  This ETF tracks a broad basket of large-cap publicly traded electric and gas utility companies.  It’s also been known to demonstrate a high degree of sensitivity to changes in interest rate trends.

The Bottom Line

There is no telling when the stock market will opt to take a breather from its current vertical trajectory.  Although, there are burgeoning signs that some investors are worried about the latest extension of the rally taking a turn lower.  Keeping an eye on the trend of these defensive-minded indexes can be beneficial in gauging the level of complacency or fear in the market.

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