Wall Street has been experiencing huge volatility over the past month triggered by rising yields, persistently high inflation and the prospect of Fed’s policy tightening. Notably, the 10-year Treasury yields climbed above 1.57% (read:
Bet on Rising Yields With Inverse Treasury ETFs). The latest U.S. Fed’s preferred inflation gauge shows the fastest annual rise since 1991, fueling concerns that price increases will last longer than expected and eventually hit consumer spending. Additionally, the regulatory crackdown as well as the potential collapse of the Evergrande property group are weighing on China’s economic growth. The decline came amid the biggest vaccination drive, expanded stimulus, a recovering economy and the resumption of corporate earnings growth. The recovering job market, and reopening economies and businesses added to the strength. The combination of all the factors has led to pent-up demand, resulting in a greater need for all types of products and services. Further, the Senate voted to temporarily increase the debt ceiling, breaking a prolonged stalemate that had rattled markets in recent weeks. Easing concerns about the U.S. debt ceiling are expected to provide a boost to the markets. A myriad of concerns 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.
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 the 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 Quick Quote XLU - Free Report) With AUM of $12.1 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. It is heavily concentrated on the top firm at 17.2% while other firms hold no more than 8.5% share. Electric utilities takes the top spot in terms of sectors at 63.9%, closely followed by multi utilities (29.6%). The product charges 12 bps in annual fees and sees a heavy volume of around 12.1 million shares on average. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Follow Buffett With These Inflation-Friendly ETF Strategies). Vanguard Real Estate ETF ( VNQ Quick Quote VNQ - Free Report) This fund follows the MSCI US Investable Market Real Estate 25/50 Index and holds 171 stocks in its basket. Specialized REITs take the largest share at 38.4%, while residential REITs and industrial REITs round off the top three with double-digit exposure each. The expense ratio comes in at 0.12%. VNQ is the most popular and liquid ETF with AUM of $42.5 billion and an average daily volume of around 4.2 million shares a day. It has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook. iShares U.S. Healthcare ETF ( IYH Quick Quote IYH - Free Report) This fund offers exposure to U.S. healthcare equipment and services, pharmaceuticals and biotechnology companies by tracking the Russell 1000 Health Care RIC 22.5/45 Capped Gross Index. It holds 116 stocks with pharma taking the top spot at 26.6%, followed by health care equipment (26.1%) and biotech (16.4%). The product has amassed nearly $2.8 billion in its asset base, while charging 41 bps in annual fees. It trades in a good volume of around 65,000 shares a day and has a Zacks ETF Rank #1 with a Medium risk outlook (read: Top-Ranked ETFs That Are Up At Least 25% So Far This Year). Vanguard Consumer Staples ETF ( VDC Quick Quote VDC - Free Report) This fund manages a $5.7 billion asset base and has exposure to a basket of 97 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 87,000 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.