Despite their soaring valuations, investors are placing record amounts of money into safe haven ETFs such as real estate, utilities, consumer staple and low vol funds, according to a recent Bloomberg report.
While the S&P 500 began October with its third week of losses, utilities ETFs saw an inflow of $726 million, according to Bloomberg data through Oct 3. This comes amid growing uncertainty in the market over trade wars, geopolitical issues, a decelerating global economy, and impeachment proceedings in Washington.
Other downbeat data, such as U.S. manufacturing at its weakest level in a decade, an inverted yield curve, and jobs data which fell short of expectations have all driven interest in safe haven investments and bond-like sectors. This surge in demand has led to valuation multiples in these defensive sectors to new highs.
While utilities stocks ended September trading at a record near 22 times earnings, valuations for real-estate companies are now at their highest levels in at least three years. Consumer-staples valuations have also increased to levels not seen since the spike in market volatility called “volmageddon” in February 2018, per Bloomberg.
“Valuations give you some pause,” said Street Corp.’s Matthew Bartolini, who heads research in the Americas for the company’s ETF business. He suggests that low interest rates, not fundamentals, have accelerated the trend. “If it were about valuation, you wouldn’t be allocating to real estate, utilities or consumer staples.”
Despite the record high prices, investors have shown that they are willing to pay up for a steady yield and peace of mind. For example, real estate ETFs saw $5.4 billion added this year, a record for any full year in at least four years.
Katie Nixon, Chief Investment Officer at Northern Trust Wealth Management, expects the defensive strategy to pay off as interest rates likely move lower.
“The search for yield is going to be a very powerful investment theme going forward, as it has been,” she said. Betting on defensive, bond-like stocks lets investors "have their cake and eat it too,” Nixon added.
Of course, while this defensive strategy hedges against a major downturn, if fears turn out to be overblown, investors could lose out.