Four Stocks Inside the ETF That’s Kicking the Market’s Ass

The markets’ response to the less-than-encouraging economic news flowing here, in Europe and China brings to mind the words of the great investment soothsayer Scooby-Doo: “Ruh-Roh.”

Just take a peek at the performance of broad market indexes in the second quarter.

SPY Chart

SPY data by YCharts

We got a nice bounce after the big jobs report selloff on June 1st, but the road ahead is plenty foggy. Locally we’re now in “Will He?/Won’t He?” guessing mode, wondering if the sluggish jobs report and downward GDP revisions will push Federal Reserve Chairman Ben Bernanke and his merry Board to launch QE3. Europe seems ever determined to continue its long-running economic version of Waiting for Godot, and China has made its slowdown official by lowering a key lending rate.

If you’re girding for yet another roller coaster summer, getting a tad defensive can pay off. The obvious gambit is that defensive sectors will hold up better in falling markets. As you’d expect, the uber defensive consumer staples sector has indeed outperformed the broader market of late.

^AXSJ Chart

^AXSJ data by YCharts

In fact, given that we’ve had two big downdrafts in the past year, playing defense paid off. The $1 billion Vanguard Consumer Staples ETF (VDC) almost doubled the market return; my proxy is the SPDR S&P 500 ETF (SPY).

VDC Total Return Price Chart

VDC Total Return Price data by YCharts

Another approach to playing offense with a good defense is to focus on low-volatility stocks. Turns out that not only do lower volatility stocks -- which is just another way to describe value stocks – deliver a smoother ride over time, but they have also managed to outperform sexier high volatility (growth) stocks.

For example, the PowerShares S&P 500 Low Volatility ETF (SPLV) ranks all 500 stocks in the index by their standard deviation over the past 252 trading days; the 100 issues with the lowest volatility make it into the ETF.

Over the rocky past year SPLV has outpaced the SPDR S&P 500 ETF (SPY).

SPLV Total Return Price Chart

SPLV Total Return Price data by YCharts

Not bad eh? So what’s inside SPLV’s portfolio? Here are the five largest holdings.

SO Total Return Price Chart

SO Total Return Price data by YCharts

Only Procter & Gamble (PG) has failed to produce a strong index-beating performance. (YCharts editor Betsy Morris is all over the many reasons why: see here and here. So let’s drop P&G from the conversation.

With that strong performance, have the remaining four -- Southern Co. (SO), Kimberly Clark (KMB), Abbott (ABT) and Coca-Cola (KO) -- gotten overly expensive? Not really, based on PE ratio.

SO PE Ratio Chart

SO PE Ratio data by YCharts

And for the defensive minded they all serve up a sweet current dividend yield compared to the 1.9% payout for the S&P 500 index.

SO Dividend Yield Chart

SO Dividend Yield data by YCharts

Moreover, all have a nice habit of increasing their dividend payouts.

SO Dividend Chart

SO Dividend data by YCharts

Carla Fried is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.



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