Risk-Off Sentiment Fueled Defensive Mindset in May

So what did investors do when the markets were awash in volatile-laden sell-offs in May as a result of U.S.-China tariff battles? They sought out consumer staples–and this could be a persisting trend that could boost the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) if trade wars become protracted.

“Thanks to renewed risk-off sentiment, cyclical sectors have underperformed defensive sectors by 3.87% over the last month causing investors to once again fear that the market’s best days are behind are it,” said the latest Direxion Relative Weight Spotlight report. “Compounding this negative sentiment is the lack of progress on the China-U.S. trade deal and a sharp drop in interest rates that appears to be driven by fears of slowing global growth or, more likely, investor realization that growth is indeed slowing just as Manufacturing Purchasing Managers Indexes have indicated for some time.”

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.

Now is the Time to Get Defensive with the "RWDC" ETF 2

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”).

Risk-Off Sentiment Fueled Defensive Mindset in May 1

With a U.S.-China trade deal already priced into the markets ahead of May and investors subsequently getting burned when negotiations took a turn for the worse, investors are now looking for another trigger event–a rate cut–except the Federal Reserve passed on that notion and stayed put recently.

“In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes,” the Federal Open Market Committee’s policy statement read.

Fed Chairman Jerome Powell reiterated his ongoing message of patience as the wait-and-see approach by the central bank continues to persist.

“The market was pricing in nothing but rate cuts,” said Gennadiy Goldberg, United States rates strategist at TD Securities. “I think he was trying to push back against the idea that the economy is turning lower and the Fed can never generate inflation.”

With the markets digesting the lack of a rate cut, the major indexes moving to the downside could signal that more defensive maneuvers might be necessary moving forward. As such, investors can look to relative weight exchange-traded funds (ETFs) to play either side of the move.

For more market trends, visit ETF Trends.