Since the day after Election Day, fiscal cliff fears have
intensified and stocks have tumbled as a result. The SPDR S&P
500 (NYSE:
SPY
) is off nearly five percent as rampant speculation that Bush-era
tax cuts will expire has permeated financial markets.
Expired tax cuts are viewed as de facto tax hikes and the
result, some fear, could be another U.S. recession. One of the
tax reductions set to expire is the 15 percent tax rate on
dividends. Conventional wisdom says that when tax rates on
dividends rise, companies are less inclined to pay and increase
shareholder payouts. Not surprisingly, investors see dire
consequences for dividend
ETFs
and those funds that track sectors known as "dividend
sectors."
ETF issuer WisdomTree pointed out on November 7 the dividend
tax went up in 1993, but the highest-yielding stocks performed
quite well from the end of 1992 through the end of 2002. Or that
market environment is more important than tax
environment
.
That could ultimately prove to be the case, but for now, just
the fear of the fiscal cliff is pressuring the following
ETFs.
Utilities Select Sector SPDR (NYSE:
XLU
)
A conservative ETF such as XLU should be the ideal hiding place
during times like these. After all, XLU has one of the lowest
correlations to the S&P 500 of the nine select sector SPDRs
funds. However, XLU
has recently failed conservative investors
. Normally a slow mover, XLU has plunged 4.7 percent since
November.
In the past week,
some noted analysts have highlighted issues with
the utilities sector
. Last week, WisdomTree Research Director Jeremy Schwartz noted
U.S. utilities are richly valued relative to their foreign
counterparts.
This week, iShares Global Chief Investment Strategist Russ
Koesterich said
utilities have "been growing progressively more
expensive relative to other segments of the market" since the
Bush tax cuts and that the sector "may be uniquely vulnerable" if
those tax cuts expire. XLU has turned negative on the year and is
just 5.8 percent above its 52-week low.
iShares Dow Jones US Telecom Index Fund (NYSE: )
Telecom stocks have fared even worse than utilities since the
election. Just look at the performance of the iShares Dow Jones
US Telecom Index Fund since November. The ETF has tumbled nearly
six percent since that day. Like utilities, telecom issues are
prized for their low correlations to the broader market and
low-beta ways. IYZ does make on the group's low-beta reputation
with a beta of just 0.83 against the S&P 500. However, some
U.S.-focused telecom ETFs share another trait in common with XLU:
Lofty valuations. IYZ's price-to-earnings ratio is 38 and its
price-to-book ratio is 3.52,
according to iShares data
.
Today, IYZ is not only trading at its lowest levels since
August, but the fund is in danger of violating its 200-day moving
average. If that happens, a return to the June lows is
possible.
Vanguard Dividend Appreciation ETF (NYSE:
VIG
)
Including the largest dividend ETF by assets on this list may
come as a surprise to some investors. Utilities and telecom names
combine for just two percent of VIG's weight. Financials, another
sector vulnerable to the fiscal cliff, represent just 6.3 percent
of VIG's weight. Consumer staples control about a quarter of
VIG's total sector exposure.
All that would be enough to make some investors ask why has
VIG been slammed to the tune of 4.7 percent since November 7.
Simply put, VIG has proven vulnerable to fears of the fiscal
cliff. With investors speculating that companies will pay out
less cash in the form of dividends or even reduce payouts if the
dividend tax rate rises, VIG has not been immune to selling
pressure.
Clearly this is a "sell the fear" event because as Schwartz
and Koesterich noted in their respective research pieces, when
dividend tax rates have risen in the past, high-yielders have
performed well and some companies have actually increased
dividends to help mitigate the affect of the higher tax rate.
Given its scant financial services and utilities exposure and
a meager 0.13 expense ratio, VIG is more of a buy under the
fiscal cliff than the other funds highlighted here.
For more on ETFs, click
here
.
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