In a volatile market environment, investors may stick to defensive sector-related exchange traded funds that could do well in most economic conditions.
However, HSBC recently argued that investors should stick to consumer staple stocks due to potential uncertainty in the pharma space, reports Julie Verhage for Bloomberg.
“In a world where global growth remains low and HSBC forecasts lower bond yields–10 year U.S. Treasury yield at 1.5 percent and German Bunds [at]0.2 percent for end 2016–these sectors [healthcare and staples]are likely to continue to command a premium,” HSBC analysts led by Ben Laidler said in a note.
Specifically, HSBC believes that political risk, such as the recent plunge in pharma stocks following Hilary Clinton’s proposed cap on patient drug costs, could further weigh on the health care sector ahead of the U.S. presidential election.
The slew of mergers and acquisitions that helped support gains in the health care space may also wane this year. HSBC said that pharmaceutical M&A activity may be past its peak after leading global sectors over the past five year.
On the other hand, defensive consumer staples may be a better bet for 2016 as the sector includes companies that make and sell basic household goods that everyone needs, regardless of economic conditions.
“By contrast staples sectors have relatively lagged, with the exception of beverages, which has seen dramatic global consolidation in recent years. Whilst we see room for activity levels to remain high, the risks are that pharma cannot lead for another year,” the analysts added.
ETF investors can also target the consumer staples sector with broad ETF options. For instance, the Consumer Staples Select SPDR (NYSEArca: XLP) tries to reflect the performance of consumer staples stocks from the S&P 500 that cover food producers, beverage companies, tobacco and personal-goods, along with food and drug retailers.
The Vanguard Consumer Staples ETF (NYSEArca: VDC) follows a similar group of consumer staples companies as XLY, except the Vanguard offering includes a broader group of about 100 components.
Additionally, for an alternative index-based offering, investors can turn to the First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG). FXG tracks a smart-beta AlphaDEX index that draws consumer staples from the Russell 1000 based on growth factors including three, six and 12-month price appreciation, sales to price and one year sales growth, and, separately, on value factors including book value to price, cash flow to price and return on assets.
Full disclosure: Tom Lydon’s clients own shares of XLP.
Max Chen contributed to this article.