Understanding Defensive Stocks, Pros & Cons, Examples

For instance, biotechnology is an attractive sub-sector of the health sector because of its movement; this is a field with constant innovation. However, if a fund invests in this sub-sector and no others, a decline could result in an outsized decline in the value of your holdings. Choosing defensive stock funds with holdings in a variety of sub-sectors within a given sector can make for less severe losses during a downturn. The Morningstar US Consumer Defensive Index advanced 4% in the fourth quarter, trailing the market’s 11.5% return by 750 basis points. With this tepid performance, the median consumer defensive stock appears slightly undervalued, trading at a 7% discount to our fair value estimate. Interest rates can be an interesting metric to follow during all types of economic cycles.

A bear market features declines of 20% or more and may come with a recession. When you invest in defensive sector funds, your main goal is to defend against significant decreases in share prices that might occur during these events. 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? Defensive stocks accommodate greed by offering a higher dividend yield than can be made in low-interest-rate environments. They also alleviate fear because they are not as risky as regular stocks, and it usually takes a significant catastrophe to derail their business model.

  1. For the 10-year period beginning in 2006, the consumer cyclical sector led all sectors in the economic recovery with a total return of 134%.
  2. Adam received his master’s in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology.
  3. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.
  4. Trading at a 35% discount to our $54 fair value estimate and with a 4% dividend yield, we think Kraft Heinz KHC is attractive.

The services segment includes hotels, restaurants and leisure facilities, media production and related services, and consumer retailing and services. Many investors like to put their money into sector hotforex broker review exchange-traded funds (ETFs) to navigate through different types of economic cycles. ETFs can limit risks with broadened diversification, while allowing for the concentration of investment positions.

What are the industries involved in consumer staples?

However, in the 12 months prior to that same date, the consumer discretionary index lost 13.17%, while the MSCI World Index was down 7.02%. It is important to remember past performance is no guarantee of future results. That’s why investors should take the time to identify their time horizon and comfort with risk. Finder.com is an independent comparison platform and information service that aims to provide you with information to help you make better decisions. We may receive payment from our affiliates for featured placement of their products or services. We may also receive payment if you click on certain links posted on our site.

Top Consumer Defensive Sector Picks

Stash does not provide personalized financial planning to investors, such as estate, tax, or retirement planning. Investment advisory services are only provided to investors who become Stash Clients pursuant to a written Advisory Agreement. 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.

But if you lost your job or if the economy was declining, you might reduce or eliminate these items from your budget. This sector includes companies that offer communication services through cellular, fiber-optic, fixed-line, wireless, and high-bandwidth networks. Their businesses follow known patterns through each phase of the economic cycle and thus tend to preserve value as the economy moves into a recession. Fidelity Select Communication Services Portfolio (FBMPX) is one such mutual fund that grants investors exposure to this sector.

Utility companies also get another benefit from a slower economic environment because interest rates tend to be lower. In a stock market downturn, owning defensive stocks may have advantages, but trading them can backfire. They may become overvalued during a recession because lots of people are snapping them up, driving up the share price for buyers.

If a recession is severe enough, cyclical stocks can become completely worthless, and companies may go out of business. 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. The healthcare sector includes businesses that provide medical services and insurance, manufacture medical equipment or drugs, and/or facilitate patient healthcare in hospitals, clinics, labs, and nursing homes. Because healthcare is a necessity and medicine and medical equipment are always in demand, this sector offers strong defensive investment opportunities. Major brands may be often able to reap the benefits during economic booms and continue to attract discretionary spending even in downturns.

What are examples of defensive stock?

Consumer cyclicals can be contrasted with consumer non-cyclicals also known as consumer staples. If a brand is a referral partner, we’re paid when you click or tap pepperstone canada through to, open an account with or provide your contact information to the provider. Partnerships are not a recommendation for you to invest with any one company.

The stock shares of consumer discretionary companies tend to lead a general stock market decline at the beginning of a contraction. These companies are essential to our daily life and do well even if the economy is waning. Water, gas, and electric utilities are examples of defensive stocks because people need them during all phases of the business cycle.

Consumer Discretionaries vs. Consumer Staples

Instead, they tend to buy only necessities such as food, healthcare services, and basic utilities. If you purchase defensive stock funds that invest in industries like these, your holdings should, in theory, decline less than others. That is because the assets that make up your fund are stocks that have historically remained steady in price during market declines. As economic conditions shift, the consumer discretionary and consumer staples indices — and by extension, their ETFs — will reflect how the market broadly expects consumer spending to change. Companies in these sectors cater to people’s basic needs, providing goods and services that are in constant and consistent demand.

These industries are called “defensive sectors” because they tend to stay stable whether the market is healthy or not. Investors seeking to protect their portfolios during a weakening economy or periods of high volatility may increase their exposure to defensive stocks. Well-established companies, such as Procter & Gamble (PG), Johnson & cryptocurrency broker canada Johnson (JNJ), Philip Morris International (PM), and Coca-Cola (KO), are considered defensive stocks. In addition to strong cash flows, these companies have stable operations with the ability to weather weakening economic conditions. They also pay dividends, which can have the effect of cushioning a stock’s price during a market decline.

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. The consumer discretionary sector is considered more volatile than the consumer staples sector, which is less sensitive to economic changes, but it offers greater potential for growth. A balance of stocks from both sectors would provide greater stability over the long term. Investors can also increase stability by focusing on consumer cyclical stocks that pay dividends.

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