Investor's Business Daily
Bears' Bite Reaches All The Way To Utilities
Thursday January 24, 6:10 pm ET
Joanne Von Alroth


With the markets down and recession in the air, most investors look to classic defensive moves to protect themselves.

But the panic has been so thick that even traditional defensive moves have been failing. One of the most glaring has been utilities exchange traded funds.

Along with commodities and agribusiness, utilities are a classic defensive choice. No matter how bad the markets get, people still need electricity, water and gas.

Even while the rest of the market slid further downward, utilities ETFs were the top-performing sector in the S&P/TSX composite over the first 12 trading days of the year. They declined, but only 2.5% compared with the huge dives seen in other sectors.

Then the panic dump started last week, and it hit across the board. Utilities, basic materials and energy all fell.

'Fear Factor'

"We have unprecedented pessimism in the market right now," said Neal Frankle, president of California-based Wealth Resources Group. "There's an interest rate fear factor, and recession fear, and it's infected absolutely everything."

The biggest decline came Tuesday, the same day as the Federal Reserve's emergency 75-basis-point 18ate cut.

"Utilities definitely got killed," Frankle said.

Some of the best-known funds, such as iShares Dow Jones U.S. Utilities (NYSEArca:IDU - News) and Vanguard Utilities (AMEX:VPU - News), saw slides of almost 3.5%.

The largest holding in both funds is Exelon (NYSE:EXC - News), which constitutes 8% of each fund. A one-time charge against Exelon's Commonwealth Edison caused a 5.1% drop in fourth-quarter earnings, officials said this week.

Chance Of Recession

Such signs -- that the U.S. could slip into recession as the global equity market dives -- spurred investors to get out while they could, even if they took a hit to the pocketbook.

Gary Gordon, president of Pacific Park Financial, told IBD last week that he believes the economy has a 70% chance of falling into recession. In a recession, people cut back their spending. Businesses, the biggest consumers of power, respond with cuts and use less energy.

Less energy used means the utilities make less money and thus the stock value falls. Still, the picture isn't entirely grim.

"The market's oversold right now," Frankle said. "If interest rates continue to decline, that'll help quite a bit.

"If the market actually gets back on the right path and interest rates head lower, these ETFs might be a good place to be."

While analysts don't recommend buying right now, investors should start thinking about what to do when the market climate improves.

"Investors need to be prepared to make solid investments," Frankle said. "The market has a way of being very resilient, so get ready."