As Oil Falls, Consumer Stocks Get Hotter

January 13, 2015


Scott Kubie, chief investment strategist of Omaha, Neb.-based CLS Investments:

We expect things to balance out and we think energy companies are a little overvalued at this point. I expect people to adjust their spending in other areas, most likely with a lag. We see some expected improvement in consumer discretionary and consumer staple stocks.


People are going to be more interested in spending money and taking the windfall that they’re getting from lower gas prices and translating it into something.


Our top-sector emphasis has been technology for an extended period of time. We continue to believe that technology spending by corporations will increase rather dramatically, and will continue to grab a greater share of capital expenditures.


Also the continued integration of technology into our daily lives is part of this. That factor is always there, but I believe it gets easier for individuals to continue to upgrade their technology if they’ve got a little bit more room in the budget because they’re not spending it on gas.


The one tech ETF we own is the Fidelity MSCI Information Technology ETF (FTEC | A-93), and we like FDIS [Fidelity MSCI Consumer Discretionary ETF (FDIS | A-94)]. We like those for their broad exposure—they cover all capitalization.


In energy, we prefer XLE [Energy Select Sector SPDR Fund (XLE | A-95)], in part because it has the highest capitalization and it’s all S&P 500. In essence, we think those big oil funds may offer the safer and better value at this point.


Matt Tucker, head of fixed income strategy at BlackRock’s iShares:

One option is to manage energy exposure by using sector-specific funds to either dial up or down exposure to energy companies. If you want to completely avoid the energy sector, you could consider the iShares Financials Bond ETF (MONY | D-58)] or the iShares Utilities Bond ETF (AMPS | C-51)], which only give you exposure to the financial and utilities sectors, respectively.


If you want to reduce your overall exposure to the energy sector, you could think about overweighting the financial and utilities sectors using MONY and AMPS along with your core investment-grade portfolio.


For example, a core portfolio consisting of just the iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD | A-77)] would have 11 percent exposure to energy companies. A portfolio with 44 percent LQD, 28 percent MONY and 28 percent AMPS would reduce that exposure by more than half, allowing you to have access to the other sectors in industrials while reducing your overall energy exposure.


The energy sector has priced in some of the impact of oil, and energy company bond prices have fallen. But if oil were to rebound, these same bonds could rally. For investors who want to position for such a potential move, consider the iShares Industrials Bond ETF (ENGN | C-83)], which currently has a 17 percent exposure to energy, the highest level of the investment-grade credit funds.



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