When other stocks are soaring, defensive stocks are more likely to perform below the market. Consumer staples stocks typically experience modest, albeit, steady growth. The profit margins on consumer staples products are known to be thin and the industry is highly competitive. Many dividend aristocrats – companies that have increased their dividends each year for at least 25 consecutive years – are part of the consumer staples sector. Vanguard’s Health Care (VGHCX) mutual fund is an example of a defensive sector fund.
When investors suspect that the economy is headed for a decline, many begin to pad their portfolios with defensive sector funds. This allows them to perform better than the broader market during a market correction or a bear market. Defensive https://www.day-trading.info/ sector funds are mutual funds or exchange-traded funds (ETFs) that invest in companies in recession-proof industries. These industries are called «defensive sectors» because they tend to stay stable whether the market is healthy or not.
That is a strong argument that defensive stocks are objectively better investments than other stocks. Warren Buffett also became one of the greatest investors of all-time in part by focusing on defensive stocks. By contrast, if you spread your money among funds in the healthcare, consumer staples, utilities, and telecommunications sectors, you can enjoy greater diversification. In turn, you would reduce—but not eliminate—the amount of loss you might experience in your portfolio if one defensive industry were to decline. That is because not all of these industries will go up or down in price under the same types of economic conditions.
Apartment real estate investment trusts (REITs) are also deemed defensive, as people always need shelter. When looking for defensive plays, steer clear of REITs that focus on ultra-high-end apartments. Also, avoid office building REITs or industrial park REITs, which could see defaults on leases rise when business slows. As such, they may not appeal to investors who seek rapid growth, or who are willing to take on a higher degree of risk for higher potential returns. Defensive stocks are also less likely to face bankruptcy because of their relative strength during downturns.
Consumer Staples: 5 Things To Know About This Defensive Sector
The return on defensive stocks is usually slow and steady, as are dividends if the company pays them, which can make it easier to predict how your investments will grow over time. That might be appealing if you’re working toward a specific financial https://www.topforexnews.org/ goal or planning for retirement. Companies engaged in the manufacturing of food, beverages, household and personal products, packaging, or tobacco. Also includes companies that provide services such as education & training services.
As such, the companies that make these items are said to maintain reliable, steady growth regardless of the economy. Defensive stocks tend to perform better than the broader market during recessions. If the market drops 2% in a week, then we would expect the stock to lose only about 1%. On the other hand, a 2% price gain in the market for one week leads to an expected increase of just 1% for the defensive stock with a beta of 0.5. On the flip side, the generally slow growth of defensive stocks often leads to smaller gains during a bull market.
- That is because the assets that make up your fund are stocks that have historically remained steady in price during market declines.
- People depend on gas, electricity, water, and other utilities in daily life.
- Vanguard’s Health Care (VGHCX) mutual fund is an example of a defensive sector fund.
- Also includes companies that provide services such as education & training services.
- In a recession, consumers tighten their belts, but they’re not likely to stop paying their electric bill, buying groceries, or skipping their prescriptions unless dire circumstances require it.
Utility companies also get another benefit from a slower economic environment because interest rates tend to be lower. On the downside, the low volatility of defensive stocks often leads to smaller gains during bull markets and a cycle of mistiming the market. Unfortunately, many investors abandon defensive stocks out of frustration with underperformance late in a bull market, when they really need them most. After a downturn in the market, investors sometimes rush into defensive stocks, even though it is too late.
Additionally, the consumer staples sector has historically experienced lower price volatility compared to other sectors, which are more correlated to business cycles. The sector’s relatively steady sales and profits also provide a source of stability during volatile markets. Water, gas, and electric utilities are examples of defensive stocks because people need them during all phases of the business cycle.
Understanding Defensive Stocks, Pros & Cons, Examples
At this time of writing, the broad-based S&P 500 index has slipped nearly 7% in the year to date, but the S&P 500 consumer staples sector is only down 4% for the same period. In difficult times or if things are getting shaky, why would anyone even want to own a stock? Why not just go for the safety of a Treasury bill, which essentially has a risk-free rate of return? The answer is quite simply that fear and greed can often drive the markets. Defensive stocks accommodate greed by offering a higher dividend yield than can be made in low-interest-rate environments.
This has prompted some investors to consider defensive stocks as a cushion for their portfolios. Shares of major pharmaceutical companies and medical device makers have historically been considered defensive stocks. However, increased competition from new drugs and uncertainty surrounding regulations mean that they aren’t as defensive as they once were. Defensive stocks are also known as noncyclical stocks because they are not highly correlated with the business cycle. The utilities sector includes electric, gas, and water utilities, as well as companies that operate as distributors or producers of those utilities.
Definition and Examples of Defensive Sector Funds
Defensive stocks are those that tend to provide stable earnings and consistent returns, even during an economic downturn. Shares of well-established companies in the consumer staples, utilities, and healthcare sectors are common examples of defensive stocks. These investments are considered more recession-proof than their cyclical stock cousins. Companies in these sectors cater to people’s basic needs, providing goods and services that are in constant and consistent demand.
Investors should not substitute these materials for professional services, and should seek advice from an independent advisor before acting on any information presented. Defensive stocks are nearly always in demand because they provide essential products and services while cyclical stocks are affected by consumer demand and systemic changes like market downturns. Utilities, consumer staples, and healthcare represent the main defensive sectors. These sectors are considered essential and typically maintain their income streams and overall stability even when the market is volatile.
Healthcare Stocks
Healthcare is a defensive sector because these companies offer products or services that consumers will still need to buy in hard times. After all, health is a primary concern, and people still visit doctors and refill their prescriptions even when they can’t afford other goods. Examples of defensive stocks include any essential items from defensive sectors like groceries, personal hygiene products, water, electricity, heating, and pharmaceuticals. Building a defensive investment strategy might help protect you from greater losses during a recession or economic downturn. Investing in defensive stocks may lower your overall risk as part of a diversified portfolio. As the name implies, they can act as a kind of protective shield that helps investors endure market downturns.
«Defensive» stocks can be found in many industries if the firm has strong earnings, innovation, pricing power, and a track record of disrupting the status quo. For DIY investors, you can use Syfe Trade to invest in specific stocks and ETFs. From now to 31 March 2022, you get to enjoy 5 free trades and super low commissions of US$0.99 per trade thereafter.
Renewable energy sources like solar panels and wind turbines are also included. Even in a recession, consumer spending on utilities is less likely to drop, so the value of stocks in this sector remain relatively stable. Finally, although consumer staples stocks hold up well in recessionary periods, they tend to lag the broader market during boom times. Broadly speaking, consumer staples are essential products that we use daily such as food, beverages, household and personal care products. Prefer to invest in the consumer staples sector via a ready-made portfolio?
This information is not intended as a recommendation to invest in any particular asset class or strategy or as a promise of future performance. There is no guarantee that any investment strategy https://www.investorynews.com/ will work under all market conditions or is suitable for all investors. Each investor should evaluate their ability to invest long term, especially during periods of downturn in the market.