As Oil Falls, Consumer Stocks Get Hotter

January 13, 2015

With oil falling to who knows how low, it’s worth considering what parts of the market are going to benefit. asked a few market strategist experts their views, and it’s a subject that we’re likely to take up again and examine from different angles.


The chart below tells the tale of the world’s most important commodity falling by more than half in the past six months and by two-thirds since just before the market crash of 2008.


Here, we look at how consumer ETFs and even tech ETFs are getting pumped up and how investors can think about fixed income, as tale of the world’s most important commodity finds a bottom in the coming days, weeks or months. 



John Forlines III, chairman and chief investment officer of Long Island, N.Y.-based JAForlines Global:

First off, the oil-price decline isn’t so bad even if you’re a large-cap integrated oil company because they’ve got so many other ways to hedge themselves. It’s the little guys who are just producing and servicing who are hurting.


Overall, the natural answer to what sector is doing better with lower oil prices is consumer-oriented businesses. So consumer discretionary looks good and, oddly enough, consumer staples look pretty good to me too. People who buy staples are often people who buy only staples, and they’re going to buy more of them when there are oil and gasoline prices like this.


Tech and health care are in their own little worlds. We’re going into our third year of being long tech and health care, and I just can’t see a secular trend where you wouldn’t want to overweight those two.


Technology has reached the point now where it’s so integrated into so many other sectors. What I’m saying is that technology will continue to roar ahead regardless of whatever is going on in the consumer discretionary area in general.


Some obvious ones we hold are the large-caps “XLY” [Consumer Discretionary Select Sector SPDR Fund (XLY | A-92)], “XLP” [Consumer Staples Select Sector SPDR Fund XLP | A-89)] and “IYW” [iShares U.S. Technology ETF (IYW | A-96)].


Some not so obvious ones we hold are “DXJ” [WisdomTree Japan Hedged Equity Fund (DXJ | B-62)], which has 26 percent consumer discretionary allocation (with the top 10 holdings all consumer discretionary with no energy or utilities). DXJ also has 15 percent tech and 9 percent consumer staples.


Another surprise holding is “HEDJ” [WisdomTree Europe Hedged Equity Fund (HEDJ | B-49)]—it has a 40 percent consumer exposure split between discretionary and staples … and don’t forget low-volatility ETFs.


The best-constructed ones avoid utilities and energy and give the consumer sector priority—“ACWV” [iShares MSCI All Country World Minimum Volatility ETF (ACWV | A-60)] is a great example—one-third of that ETF is consumer or tech, and has no energy.


By the way, the health care sector is one that has completely morphed. In the old days, you bought a defensive stock like Johnson & Johnson, but now you buy biotech because the drug pipeline is good.


There’s a huge opportunity if you’re in health care because of the rich people in the developed countries. They’re going to buy the latest developments in health care because they want to live longer and they can afford it. And, by the way, that’s far closer to the nexus of the price of oil dropping than technology is.


If you’re looking for an added kick to health care, it’s the fact than ma and pa in the middle class who otherwise probably wouldn’t get that hip operation, they might do it now because lower oil prices have kept more money in their pockets so that now they can afford that kind of a procedure.




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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