Investing in Defensive Sectors

Brittney Barrett  |

Less than a month ago with the indexes at their multi-year highs, many were saying the old adage of selling stocks in the spring didn’t apply this year. Now, they’re eating their words. The European sovereign debt crisis is shaking international markets, U.S. economic growth is slowing and we’re approaching the end, really this time, of the Federal Reserve’s contributions to our economic recovery.

Bearing in mind these factors, perhaps it’s high time for investors to get more defensive.  Health care (XLV), consumer staples (XLP) and utilities (XLU), have outperformed cyclical by 11 percent on average while recording 8 percent outright gains.

Typically during a risk-off time, investors might look to silver ETFs, energy stocks and others of their ilk, but given the bubble notions surrounding these areas, it longer looks like such a great idea. That explains the move toward the three sectors listed above.

All three sectors, typically considered not-so-exciting, have been steadily attracting investors, while more volatile sectors, like energy, are losing their appeal. The advance has been prompted by the aforementioned anxiety regarding the discontinuation of the Fed’s $600 billion bond buying program, otherwise known as “quantitative easing.”  The worries over whether America will be able to stand alone have cause these sectors to push higher.

There is worry that the end of Quarter 2 will see further weakness, a fear that analysts suggest easing by weighting the portfolio heavily on the defensive sectors and beginning to shed cyclical ones.

Paul Nolte, director of investments at Chicago-based Dearborn Partners, is all in favor of making this shift according to a research note.

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“We’re in the early stages of at least a few quarters where those types of sectors outperform the broad market,” he says.

Health care can be employed as an example of the first signs of this.  Higher share prices overall are indicating a pickup in relative strength against the S&P 500. Johnson & Johnson (JNJ) and Pfizer (PFE), which comprise nearly 25 percent of XLV’s portfolio, are Nolte’s selections for potential defensive plays. The window for investing; however, is short. It won’t be too long since these stocks, which are up significantly for the year will get into expensive territory and be overbought.

Investors who are looking to inject their portfolio with these type stocks but are more attracted to diversity may look to exchange-traded funds focused on health care and biotechnology. iShares Dow Jones U.S. Health Care Providers Index Fund (IHF) is up around 10 percent for the month, while Health Care Select Sector SPDR has also made continuous progress.

Healthcare, of the defensive sectors seems to be a favorite among investors. It is an industry that can stand alone with demand and innovation, more than say utilities, which as a result of sharp increases, are looking a little over valued according to some anaylsys.

Consumer staples, for their part, are looking promising as more and more people subscribe to the philosophy of investing in what you know. The sector was recently upgraded by S&P analysts to “overweight” from “market weight,” based on their capacity to soften portfolio damage in a volatile, down-turning market. People tend to buy the staples housed in this category regardless of the economic condition, making it a safe haven

General Mills Inc. (GIS) and McCormick & Co. (MKC) are among the draws in this category, both rising steadily with fears over the short-term future of the market.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not necessarily represent the views of Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to:


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