Sector ETFs for Defense: Utilities and Consumer Staples

May 24th at 1:01pm by John Spence

Defensive sectors such as utilities and consumer staples lagged the market in early 2012 but have closed the gap during the recent risk-off bout.

Some investors are hunkering down in these more-stable sectors and there are many ETF options to choose from.

Many traders use State Street’s Sector SPDR lineup when targeting specific U.S. industries. The ETFs include Utilities Select Sector SPDR (NYSEArca: XLU) and Consumer Staples Select Sector SPDR (NYSEArca: XLP).

As of May 21, utilities and energy were the only sectors in negative territory for 2012. [Playing Defense with Sector ETFs in a Volatile Market]

Utilities are trailing the S&P 500 year to date, reversing last year’s trend when the sector outperformed as investors placed a premium on dividends and safety. [Utilities ETFs for Dividends, Stability]

Consumer staples are another traditional defensive sector because the companies sell necessities that consumers need in any economy. The sector is outperforming the S&P 500 along with utilities in May as investors fret over Greece and the possibility of another global slowdown. [Defensive ETFs for a Market Pullback]

Consumer discretionary ETFs are beating consumer staples funds so far this year, but that trend is also reversing in May on the safety trade. This is another example of investors moving away from risk.

“There is no reason to believe another 2008 is around the corner. Even with that said, many investors I speak with are looking for lower-risk ETFs that will move higher if the market rallies, but will not take as big a hit on a pullback. Unfortunately, there is no perfect ETF for that scenario. One of the best sectors for maintaining exposure to the equity market with below average risk is the consumer staples,” wrote Matt McCall at Investopedia.

“If the risk-on trade that was working early in 2012 comes back, it will be good for the high-risk sectors that does not include the consumer staples. If the current movement back to less risky asset continues into the summer, then the consumer staples will be the place to be,” he added.

Sector SPDR Performance in 2012

  • Consumer Discretionary: +9.9%
  • Consumer Staples: +4.1%
  • Energy: -5%
  • Financials: +7.3%
  • Healthcare: +5.5%
  • Industrial: +3.8%
  • Materials: +1.1%
  • Technology: +11%
  • Utilities: -0.5%

Data source: Morningstar as of May 21, 2012.

The chart below shows the relative performance of a utilities ETF versus the S&P 500.


The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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