As recession fears mount, growth stocks are increasingly vulnerable while defensive stocks offer added allure for investors wanting to remain engaged with equities. The Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) is an ETF for that theme.
RWDC is part of a broader suite of relative weight products developed by Direxion. The underlying indices for each Relative Weight ETF is built with a 150% long component and 50% short component, resulting in a net exposure of 100% of assets. Each ETF and its benchmark index has an oppositely-weighted counterpart. The ETFs provide relative outperformance if the long component outperforms the short component. The strategy implements the long side of the trade, and then also rewards an investor when a macro view is correct.
In the current environment, RWDC could be useful for skittish investors.
Morgan Stanley’s Mike Wilson, “, the firm’s chief U.S. equity strategist, sees defensive bond proxies outperform growth names by another 10% as the U.S.-China trade war weighs on consumer sentiment, which adds to a long list of recessionary indicators that are already flashing red,” reports CNBC.
Reasons RWDC Looks Good
During periods of accelerating growth, asset categories including value, small-cap and cyclical stocks that exhibit high levels of business leverage and needed access to credit tend to outperform. On the other hand, when we are in a slow down or a contraction, the growth, large-cap and defensive categories outperformed as they provide more diversified businesses and showed lower fixed costs to help them weather economic storms.
“At the end of a growth scare when recession fears emerge, secular growth stocks typically underperform defensives,” said Morgan Stanley’s Wilson. “Slowing job creation and slowing hours worked, stock market volatility and new tariffs are all potential weights on consumer spend.”
Related: Alternative ETF Strategies to Better Manage Market Risks
Increasing the allure of RWDC is the new round of tariffs the U.S. just slapped on Chinese goods, a move that some market observers expect will pinch the U.S. consumer at a time when some data points show consumers are getting more cautious.
“Since the consumer is 70% of the economy, the overall impact on the economy could be greater for this round … Keep in mind that last year’s first-round of tariffs happened when companies were still enjoying a massive profits/margin windfall from the tax cuts. With that windfall now gone, the ability to eat the tariffs is much lower today,” Wilson said, reports CNBC.
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