Exchange traded fund (ETF) investors can play defense with their fund choices by focusing on areas of the market that hold up better in a downturn than other sectors.
Many market analysts believe we are in a recession, defined as two consecutive quarters of a decline in gross domestic product, so why not look to sectors that will withstand this?
Sectors such as health care and consumer staples always retain some stability as well as funds that track food or tobacco. Eleanore Laise for The Wall Street Journal suggests ETF such as these:
- Consumer Staples Select Sector SPDR (XLP): Down 14.9% year-to-date, compared to -38% for the S&P 500; holds Wal-Mart (WMT) and Procter & Gamble (PG). Consumer staples fares better in down periods, as everyone needs the bare essentials in a downturn. But consumers are scaling back on food spending, a recent study has revealed.
- Pharmaceutical HOLDRs (PPH): Down 13.7% year-to-date; holds Merck (MRK) and Pfizer (PFE). Pharmaceuticals get an assist from an aging populations, and many pharmaceutical companies pay dividends. However, this industry could be hurt by consumers who have opted to scale back on taking their prescription drugs.
- Vanguard Industrials (VIS): Down 17.7% year-to-date; holds Caterpillar (CAT) and 3M (MMM). Industrials have a tendency to fare well in a recovery, and many shares in this sector have plummeted to the bargain basement.
These funds, like many others, are off their 200-day and 50-day moving averages, so they’ll need some time to recover. They’re by no means completely immune from the ravages of the market. But they’re not as sharply off their highs as some other sectors, and when the economy begins to recover, perhaps they’ll feel the impact sooner than other ailing sectors.
And bear in mind – nobody has to remain in this market. There’s always the choice to be in cash until the current climate reverses itself.
The opinions and forecasts expressed herein are solely those of Tom Lydon, 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.