Put Up or Shut Up — How Did Those ‘Low-Risk’ ETFs Hold Up?

The financial press has an abundance of advice but a bit of a shortage when it
comes to follow-up. Few writers bother to review how those "three hot stock
picks" they recommended actually performed in practice. Frankly, they should.
When you make a good call, you deserve credit. But you "own" the bad calls,
too. People invest their hard-earned money after reading what you had to say.
You owe it to them to go back and check your work. Today, I'm going to revisit
an article I wrote in late March: " Three Low-Risk ETFs to Ride Out a Volatile
Spring ." At the time of the original article, the Arab Spring was in its
infancy, the Japanese Fukushima plant threatened the world the with the worst
nuclear disaster since Chernobyl, and the sovereign debt crisis had just caused
the sitting Portuguese government to fall. The markets long ago lost interest in
the Arab political revolution and the Japanese nuclear disaster, but the euro
zone crisis actually has deepened. That "volatile spring" ending up bleeding
over into a volatile summer and a volatile early fall as well. And if we
don't get a resolution of the ongoing Greek crisis soon, we can look forward
to a volatile winter. Click to Enlarge Since the original article went to press,
the S&P 500 is down 14% (see black line in chart). Let's see how my
recommendations did. Utilities Select Sector SPDR (NYSE: XLU ): Of the three
ETFs recommended, XLU is the clear winner. At time of writing, it shows a price
return of more than 4%, which does not include the 68 cents per share in
dividends. The dividends add an additional 2.2% for a total return of more than
6%. Not a bad return, all things considered. On a total return basis, it's
about 20% better than the S&P 500. But perhaps what is most impressive is that
even during the pits of the August selloff, investors who bought in March would
have been down less than 4%. Again, not bad. During the course of the fourth
quarter, readers might want to take profits in the utilities sector and
reallocate their funds to more growth-oriented sectors. iShares Dow Jones US
Healthcare (NYSE: IYH ): My rationale for recommending Big Pharma was pretty
straightforward. The stocks in the sector already had been punished by fears of
patent expirations, and I believed the selling to be overdone. Furthermore,
health care is a defensive industry. Even if it's not "recession-proof,"
it's certainly recession-resistant. IYH sold off far more aggressively than
XLU, but it still managed to hold up fairly well. At time of writing, IYH is
down 6% from my recommended price versus a 14% loss on the S&P 500. This does
not include the nearly 1% that the ETF has paid in dividends during the period.
Overall, I can't complain about IYH's performance. To survive the bloodbath
of the past six months with only minimal losses is an accomplishment. I continue
to see a lot of value in Big Pharma, and I recommend that readers hold on to
their shares of IYH. iShares S&P Global Telecommunications (NYSE: IXP ): This
recommendation has been a bit of a disappointment to me. Yes, it performed
better than the S&P 500. But its price still is down 10%. After the $1.73 per
share in dividends, the loss is closer to 7%. That's not bad, but given the
cheap valuations in the sector, the steady dividend payout and the defensive
nature of the business, I would have expected better. Of the three ETFs, IXP
would be my favorite at the moment. The companies that comprise the fund's
holdings are in the unique position of being "defensive" in the developed
markets of the United States and Europe, and "growth investments" with
respect to their prospects in emerging markets. During the past year, I've
highlighted the Spanish telecom giant Telefónica (NYSE: TEF ) for its exposure
to the fast-growing markets of Latin America, which make up 40% of company
revenues. Telefónica is a major holding of IXP, and there are plenty more just
like it. I would like to reiterate my buy recommendation of IXP. Whether the
volatility finally is over or not, I consider the telecom sector to be the best
value for your dollar today.