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Forget Trade Fears, Invest in Defensive Sector ETFs

Sweta Killa

After a calm of about five months, trade tensions resurfaced this week with Donald Trump’s tariff threat. Trump is seeking to increase tariff on Chinese goods worth $200 billion to 25% from 10% on May 10 and an additional 25% tariff on further $325 billion of Chinese goods "shortly."    

In return, China threatened to retaliate if Trump puts into action his latest tariff threat ahead of the meeting in Washington today. The situation led to risk-off trading though bouts of economic data bode well for the stock market. As such, investors are seeking to beat the fresh tariff woes by betting on defensive sectors like utilities, real estate, healthcare and consumer staples (read: Volatility ETFs Spike on Renewed Trade Tensions).  

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 outsized yields.

REITs own and operate income-producing real estate. They are required to distribute at least 90% of taxable income to shareholders annually in the form of dividends and, in turn, can deduct those dividends paid from their corporate taxable income. Thus, REITs offer juicy dividend yields. Further, REITs have low correlation with other stocks and bonds, thereby providing huge diversification benefits to the portfolio.

Healthcare, which generally outperforms during periods of low growth and high uncertainty, also 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. Stocks in these sectors generally outperform during periods of low growth and high uncertainty (read: 5 ETF Strategies to Beat Sell in May and Go Away).

Given this, we have highlighted one ETF each from these four zones.

Utilities Select Sector SPDR XLU

With AUM of $9.1 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 while other firms hold no more than 8.3% share. Electric utilities takes the top spot in terms of sectors at 60.2%, closely followed by multi utilities (33.1%). The product charges 13 bps in annual fees and sees heavy volume of around 18.7 million shares on average. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Schwab US REIT ETF SCHH

SCHH tracks the Dow Jones U.S. Select REIT Index, holding a well-diversified 99 stocks with none accounting for more than 8% of the assets. Residential REITs make up for the largest share at 23.1% while retail REITs, office REITs, specialized REITs and healthcare REITs round off the next four spots with double-digit allocation each. The product has AUM of $5.4 billion and average daily trading volume of 932,000 shares. It charges 7 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Real Estate ETF Hits New 52-Week High).

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 129 stocks. In terms of industrial exposure, pharma takes the top spot at 31.4%, followed by health care equipment (22.6%) and biotech (18.2%). The product has amassed nearly $2.1 billion in its asset base, while charging 43 bps in annual fees. It trades in good volume of around 147,000 shares a day and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Vanguard Consumer Staples ETF VDC

This fund manages a $4.8 billion asset base and has exposure to a basket of 92 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, hypermarkets & super centers, and tobacco that make up for a double-digit allocation each. The fund has a Zacks ETF Rank #1 with a Medium risk outlook (read: Beat Renewed Trade Tensions With These ETFs).

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