As volatility spikes and markets gyrate, some investors have turned to more conservative stocks and defensive sector exchange traded funds to ride out the storm.
For instance, many have traditionally turned to defensive sectors like utilities, consumer staples and health care – sectors that would hold up in any economic cycle as U.S. consumers will always need basic electricity, foods and health services.
Investors can also capitalize on these more defensive plays through sector ETF options. For example, the Vanguard Utilities ETF (NYSEArca: VPU) , iShares U.S. Utilities ETF (NYSEArca: IDU) and Fidelity MSCI Utilities Index ETF (NYSEArca: FUTY) provide broad exposure to the utilities sector.
The Consumer Staples Select SPDR (NYSEArca: XLP), First Trust Consumer Staples AlphaDEX Fund (NYSEArca: FXG) and Vanguard Consumer Staples ETF (NYSEArca: VDC) allow investors to gain access to the big consumer staples names.
Lastly, investors can track the diversified health care sector through the Health Care Select Sector SPDR (NYSEArca: XLV), iShares U.S. Healthcare ETF (NYSEArca: IYH), Vanguard Health Care ETF (NYSEArca: VHT) and Fidelity MSCI Health Care Index ETF (NYSEArca: FHLC).
“With U.S. stock indices in the red to start the year and market volatility beginning to climb, some are suggesting that investing in the defensive sectors may be a smart bet,” writes Andrew Birstingl, Research Analyst at FactSet. “The intuition here is that companies in the defensive sectors, like Consumer Staples, Utilities, and Health Care, have lower betas and are, therefore, less prone to changes in the business cycle.”
Investing in these defensive sectors has been a good move during down markets. In the 10 worst performing quarters since 1995, the three defensive sectors outperformed the benchmark in every quarter.
On average, the defensive sectors outperformed the S&P Composite 1500 by 4.9 percentage points in the 10 worst performing sectors over the past two decades, with a quarterly average return of -9.1%, compared to the broader benchmark’s -14% return.
However, the three sectors’ more conservative nature dragged on their performance during bullish periods. In the 10 best performing quarters since 1995, the defensive names underperformed the benchmark in every quarter, trailing the broader S&P Composite 1500 by 5.9 percentage points, with defensives showing an average return of 8.8%, compare to the benchmark’s 14.7% return.
The defensive sectors also typically outperform the benchmark when the CBOE Volatility Index, or so-called VIX, spiked, according to FactSet data. When the average daily VIX levels surpassed 50, defensive sectors saw an average monthly return of -3.9%, compared to the S&P Composite 1500 return of -6.9%.
Max Chen contributed to this article.