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Tickers in this Article: XLU, XLP, SO, EXC, WMT, PG, PM
The first two weeks of May have been difficult for investors who own stocks and ETFs. The S&P 500 has fallen about 4.3%, and the Dow Jones Industrial Average has shed 3.5% of its value. Mixed in with the losses was the biggest intraday drop for the Dow ever - 998 points. The weakness and volatility has investors searching for stocks and ETFs that offer more stability. IN PICTURES: How To Make Your First $1 Million

Two sectors that have been holding up better than the overall market are utilities and consumer staples. During the first two weeks of May, the SPDRs Select Sector Utilities ETF (NYSE: XLU) lost 1.7% and the SPDRs Select Sector Consumer Staples ETF (NYSE: XLP) dropped 1.3%, both much better than their peers.

Utilities

The utility stocks have long been regarded as a sector that will outperform during a short-term market pullback or even a bear market. During 2008, when the S&P 500 fell 38.5%, XLU dropped 31.4%, slightly better than the index. In 2010, through May 14 XLU was struggling to keep up with the S&P 500 even though it has held up better during the recent sell-off. But if you believe more weakness is ahead for overall stocks, XLU could be a way to protect and diversify your portfolio. Also keep in mind that XLU currently pays a 4.2% dividend.

Within the utilities sector, several sub-sectors offer an array of stocks to choose from. The top holding in XLU is Southern Co. (NYSE: SO), an electric company based in the Southeastern U.S, which has held up well during the recent sell-off and pays a 5.3% dividend. A diversified utility that has underperformed the market and the sector is Exelon Corp. (NYSE: EXC), a provider of power to Illinois and Southeastern Pennsylvania. I find EXC attractive due to its exposure to nuclear energy and its 5.0% dividend yield.

Consumer Staples

Similar to the utilities sector, XLP also held up better than the market during the 2008 sell-off; the ETF only lost 17.1% versus 38.5% for the S&P 500. So far in 2010, XLP is keeping pace with the overall market, and if I had to choose one of the two sectors it would be consumer staples because of the potential upside.

The largest XLP holding is Proctor & Gamble (NYSE: PG), probably the best one-stop stock that covers a large portion of the sector. The company is best known for its brands Crest, Downey, Bounty, Duracell, Gillette and Pampers. The stock has been trading in a narrow range for the last six months between $60 and $65 most of the time. Buying near $60 with the 3.1% dividend sounds like a solid long-term strategy.

The No.2 and No.3 holdings in the ETF are Wal-Mart (NYSE: WMT) and Philip Morris (NYSE: PM). Both stocks are often hated by investors and consumers for very different reasons, and the action of their stock price is also varied. WMT was very unique in that during the 2008 sell-off, it actually rose in value by 18%, though since that time it has struggled. PM, on the other hand, fell in 2008 but has been on a steady uptrend since the March 2009 market bottom. Forgetting what the two companies do for a minute, I would choose PM over WMT due to its chart, fundamentals and 5% dividend yield. (For related stock analysis, take a look at Big Dividends In Utilities.)

Conclusion

If you are not concerned about the recent pullback and feel the market will resume the uptrend in the near future, then the two sectors above are probably not your best choice. However, there is nothing wrong with adding a little diversification and hedging for a pullback.

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