An exchange traded fund (ETF) industry strategist recommends investors overweight defensive sectors such as healthcare while trimming small-cap stocks to moderate risk in their equity portfolios.
Russ Koesterich, iShares global chief investment strategist at BlackRock, says among defensive sectors, he prefers healthcare over utilities and consumer staples. The analyst is avoiding utilities as he thinks they will be vulnerable to rising interest rates, while consumer staples companies are seeing input prices rise.
Healthcare stocks have “better pricing [and]more compelling valuations,” Koesterich wrote in a blog post.
“Starting with pricing power, the Consumer Price Index (CPI) for Medical Care has consistently outpaced overall inflation. Since 1995, CPI for Healthcare has risen by 4% a year, on average, versus less than 2.5% for a broad consumption basket,” the strategist said. “In recent years this trend has accelerated.”
The largest healthcare ETFs by assets include Health Care SPDR (NYSEArca: XLV), Vanguard Health Care ETF (NYSEArca: VHT) and iShares Dow Jones U.S. Healthcare (NYSEArca: IYH). [Pharma, Healthcare ETFs in Focus on M&A Talk, Earnings.]
Vanguard Health Care ETF
Another way investors can reduce risk in their stock portfolios is by cutting back exposure to small-cap companies, which tend to be more volatile and “appear to be fairly expensive relative to larger companies.” [For Stocks, Smaller Was Better the Past Decade.]
Koesterich said stocks have been resilient this year “but several factors— including the pending completion of the QE2 asset purchase program and the onset of late spring/summer, a perennially weak season for equities— will bring increased risk to the markets going forward.”
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.