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Bet on Defensive Sector ETFs as Stimulus Talks Stall
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Hopes of additional fiscal stimulus faded after President Donald Trump called off talks on the coronavirus relief package with Democratic lawmakers until after the election.
Per Cleveland Federal Reserve President Loretta Mester, the end of stimulus talks will put a dent in efforts to bring the economy back from its pandemic-induced slide. Though the economic recovery will continue without additional stimulus, it will be much slower and disappointing. In the absence of new stimulus, the U.S. economy plunged 31.4% in the second quarter per the latest data from the Commerce Department. It is more than three times larger than the fall of 10% in first quarter of 1958, when Dwight Eisenhower was the president.
Fresh stimulus was much needed to control the economic devastations caused by the resurgence in cornavirus cases. Per the latest report, at least nine U.S. states have reported record increases in COVID-19 cases during the last seven days, mostly in the upper Midwest and West where colder weather is forcing people to stay indoors. Fed Chair Jerome Powell warned that the U.S. economic recovery remains far from complete. He said the domestic rebound could still slip into a downward spiral if coronavirus is not effectively controlled and growth sustained (read: 5 Coronavirus-Themed ETFs That Can Fight the Pandemic Scares).
According to the latest survey from the National Association for Business Economics, economists have become less bullish about U.S. economic recovery from the COVID-19-induced recession amid concerns about the potential continuation of the virus.
The halt in stimulus talks has made investors jittery, resulting in a flight to defensive sectors like utilities, real estate, healthcare and consumer staples.
Why Defensive Sectors?
Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil. Real estate also often acts as a safe haven in times of market turbulence and concurrently offers higher returns due to their juicy yields (read: Here's Why REIT ETFs are Sizzling With Opportunities).
Healthcare, which generally outperforms during periods of low growth and high uncertainty, garnered investors’ interest due its non-cyclical nature. Being defensive in nature, the consumer staples sector also sees steady demand in the event of an economic downturn due to its low level of correlation with economic cycles. It generally acts as a safe haven amid political and economic turmoil.
Given this, we have highlighted one ETF each from these four sectors.
With AUM of $11.3 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. The fund is heavily concentrated on the top firm at 16.5% while other firms hold no more than 7.9% share. Electric utilities takes the top spot in terms of sectors at 62.7%, closely followed by multi utilities (31.3%). The product charges 13 bps in annual fees and sees heavy volume of around 12.9 million shares on average. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETF Strategies to Fight the Rising Coronavirus Fears).
This fund tracks the real estate sector and tracks the Real Estate Select Sector Index, holding well-diversified 31 stocks with none accounting for 14.1% of the assets. It has AUM of $2.3 billion and average daily trading volume of 4.1 million shares. It charges 13 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.
This fund offers exposure to U.S. healthcare equipment and services, pharmaceuticals and biotechnology companies by tracking the Dow Jones U.S. Health Care Index. It holds 122 stocks with pharma taking the top spot at 27.1%, followed by health care equipment (25%) and biotech (18.2%). The product has amassed nearly $2.3 billion in its asset base, while charging 43 bps in annual fees. It trades in good volume of around 53,000 shares a day and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
This fund manages a $5.4 billion asset base and has exposure to a basket of 94 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. It charges fee of 10 bps per year and trades in a good volume of around 217,000 shares. The product is widely spread across household products, soft drinks, packaged foods & meat, and hypermarkets & supercenters that make up for a double-digit allocation each. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.
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Bet on Defensive Sector ETFs as Stimulus Talks Stall
Hopes of additional fiscal stimulus faded after President Donald Trump called off talks on the coronavirus relief package with Democratic lawmakers until after the election.
Per Cleveland Federal Reserve President Loretta Mester, the end of stimulus talks will put a dent in efforts to bring the economy back from its pandemic-induced slide. Though the economic recovery will continue without additional stimulus, it will be much slower and disappointing. In the absence of new stimulus, the U.S. economy plunged 31.4% in the second quarter per the latest data from the Commerce Department. It is more than three times larger than the fall of 10% in first quarter of 1958, when Dwight Eisenhower was the president.
Fresh stimulus was much needed to control the economic devastations caused by the resurgence in cornavirus cases. Per the latest report, at least nine U.S. states have reported record increases in COVID-19 cases during the last seven days, mostly in the upper Midwest and West where colder weather is forcing people to stay indoors. Fed Chair Jerome Powell warned that the U.S. economic recovery remains far from complete. He said the domestic rebound could still slip into a downward spiral if coronavirus is not effectively controlled and growth sustained (read: 5 Coronavirus-Themed ETFs That Can Fight the Pandemic Scares).
According to the latest survey from the National Association for Business Economics, economists have become less bullish about U.S. economic recovery from the COVID-19-induced recession amid concerns about the potential continuation of the virus.
The halt in stimulus talks has made investors jittery, resulting in a flight to defensive sectors like utilities, real estate, healthcare and consumer staples.
Why Defensive Sectors?
Being a low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil. Real estate also often acts as a safe haven in times of market turbulence and concurrently offers higher returns due to their juicy yields (read: Here's Why REIT ETFs are Sizzling With Opportunities).
Healthcare, which generally outperforms during periods of low growth and high uncertainty, garnered investors’ interest due its non-cyclical nature. Being defensive in nature, the consumer staples sector also sees steady demand in the event of an economic downturn due to its low level of correlation with economic cycles. It generally acts as a safe haven amid political and economic turmoil.
Given this, we have highlighted one ETF each from these four sectors.
Utilities Select Sector SPDR (XLU - Free Report)
With AUM of $11.3 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. The fund is heavily concentrated on the top firm at 16.5% while other firms hold no more than 7.9% share. Electric utilities takes the top spot in terms of sectors at 62.7%, closely followed by multi utilities (31.3%). The product charges 13 bps in annual fees and sees heavy volume of around 12.9 million shares on average. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: ETF Strategies to Fight the Rising Coronavirus Fears).
Real Estate Select Sector SPDR Fund (XLRE - Free Report)
This fund tracks the real estate sector and tracks the Real Estate Select Sector Index, holding well-diversified 31 stocks with none accounting for 14.1% of the assets. It has AUM of $2.3 billion and average daily trading volume of 4.1 million shares. It charges 13 bps in annual fees and has a Zacks ETF Rank #3 with a High risk outlook.
iShares U.S. Healthcare ETF IYH)
This fund offers exposure to U.S. healthcare equipment and services, pharmaceuticals and biotechnology companies by tracking the Dow Jones U.S. Health Care Index. It holds 122 stocks with pharma taking the top spot at 27.1%, followed by health care equipment (25%) and biotech (18.2%). The product has amassed nearly $2.3 billion in its asset base, while charging 43 bps in annual fees. It trades in good volume of around 53,000 shares a day and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
Vanguard Consumer Staples ETF (VDC - Free Report)
This fund manages a $5.4 billion asset base and has exposure to a basket of 94 consumer stocks by tracking the MSCI US Investable Market Consumer Staples 25/50 Index. It charges fee of 10 bps per year and trades in a good volume of around 217,000 shares. The product is widely spread across household products, soft drinks, packaged foods & meat, and hypermarkets & supercenters that make up for a double-digit allocation each. The fund has a Zacks ETF Rank #3 with a Medium risk outlook.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>