Utilities and these other stocks win when volatility strikes Wall Street


Pedestrians pass in front of the New York Stock Exchange, May 24, 2019.

Michael Nagle | Bloomberg | Getty Images

Volatility is back on Wall Street.

The average daily point range of the Dow Jones Industrial Average so far this month is about 482 points, which is more than double the average daily range from the rest of the year (224 points from January to July).

The CBOE Volatility index, a gauge for investor fear, has risen nearly 50% this month but based on past surges in uncertainty this could be a buying opportunity.

Stocks have whipsawed in August on concerns about the trade war between the U.S. and China and global economic uncertainty. On Monday stocks fell on worries and falling yields, followed by a rally in stocks of 300 points on Tuesday when Trump delayed and cancelled tariffs on select items. Just yesterday, the Dow dropped 800 points as investors worried an inverted yield curve means a recession is coming.

CNBC used Kensho, a hedge fund analytics tool, to track the top ETF performers the week after the volatility Index, a measure of the 30-day implied volatility of U.S. stocks also known as the VIX, popped above the 15 level. The VIX has breached this key fear level 82 times in the past 10 years and data showed that the utilities ETF has the biggest returns following bursts of uncertainty.

The Utilities Select Sector SPDR Fund (XLU), which holds stocks like Duke Energy, Dominion Energy and Southern Company, rose 0.35% in the week after the VIX popped over 15.

Utilities are generally more stable stocks, as demand for electricity and gas is a steady consumer and business need. And the shares pay above-average dividends.

The second-best performing ETF was the iShares U.S. Real Estate ETF (IYR). The group of real estate stocks rose 0.28% in the week following surges in volatility.

Real estate companies tend to have higher dividends, which is attractive for investors searching for yield in a volatile environment. The high dividend comes from real estate company’s strong cash flow. In the case of tax laws for REITS, the companies are forced to distribute a certain percentage of income, which also drive yield higher.

Prologis, Equinix and American Tower are all in the XLU real estate portfolio. One caveat, if the volatility is the result of a recession centering on real estate, these names could get hit as well.

As a proxy for bonds in times of economic uncertainty, the U.S. Treasury ETF was also a strong performer following a spike in volatility. The iShares 20+ Year Treasury Bond ETF (TLT) rose 0.24% when the VIX breached the 15 level.

The financial sector ETF and the healthcare ETF also rose following increased uncertainty.

The Financial Select Sector SPDR Fund (XLF) returned 0.18% and the Health Care Select Sector SPDR Fund (XLV) returned 0.15% in the 5 days after the VIX rose.

This month’s volatility is not quite at levels breached in December 2018, when the Dow saw an average daily range of 600 points.

CNBC’s Jim Cramer said Tuesday the markets should be prepared for “choppy waters and perhaps a modest pullback,” as the S&P 500 index and the VIX typically run in opposite directions.

Stocks rebounded slightly on Thursday in more volatile trading.

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