Are Investors Paying Too Much for Defense in Today's Market?

Right now, it’s all about defense–from the coronavirus spreading, March Madness basketball strategies–seems like it’s defense, defense, defense. Of course, the same narrative applies when it comes to investors’ portfolios, but some market experts warn that the price of defense might be getting a bit too high.

“I would not be chasing defensive sectors right here,” Mark Tepper, president and CEO of Strategic Wealth Partners, told CNBC’s “Trading Nation”, noting that “valuations are ridiculous.”

“You’re paying a lot for little to no growth,” Tepper said. “In my opinion, if you want to be defensive, you can pick up yield with a much more attractive valuation elsewhere. So, health care would be a good example.”

Moreover, Tepper stressed tranquility should be the best defense amid all the volatility. Just look at the spike in the CBOE S&P 500 Volatility Index:

^VIX Chart

^VIX data by YCharts

“There’s a lot of fear in the market right now, so, just stay calm,” Tepper said. “We’ve been coming up with our shopping list of all the stocks that we love. Maybe they were too expensive for us to get behind a month ago, and we’re just waiting for them to fall into our laps. And once the price gets to a level that’s reasonable, a price that we feel makes the valuation attractive, we’re pulling the trigger.”

A Different Way to Play Defense

If investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors. RWDC tilts towards defensive sectors like health care and consumer staples as shown in the fund’s breakdown. Conversely, it shorts names like the top technology giants that skew towards momentum.

RWDC seeks investment results that track the MSCI USA Defensive Sectors – USA Cyclical Sectors 150/50 Return Spread Index. The Index measures the performance of a portfolio that has 150% long exposure to the MSCI USA Defensive Sectors Index (the “Long Component”) and 50% short exposure to the MSCI USA Cyclical Sectors Index (the “Short Component”).

Conversely, for investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well but from their outperformance compared to defensive sectors.

For more market trends, visit ETF Trends.