Investors' rising concerns about Fed's battle to temper multi-decade high inflation and rising geopolitical uncertainties drove the stock market to a significant correction earlier this year. And all three major indexes have witnessed declines so far this month.
Amid a possible economic downturn due to rising oil prices and surging inflation, we think investors should consider investing in the defensive sector because it tends to outperform the broader market when economic growth slows. According to DataTrek Research, the healthcare, utilities, and consumer staples sectors have outperformed the S&P 500 by as much as 15-20 percentage points during periods of economic uncertainty over the past 20 years.
Therefore, investors should consider investing in ETFs SPDR Select Sector Fund - Utilities (XLU), Vanguard Consumer Staples ETF (VDC), and iShares U.S. Consumer Goods ETF (IYK), which hold consumer defensive stocks.
SPDR Select Sector Fund - Utilities (XLU)
XLU is one of the most popular options for investors seeking exposure to the U.S. utility sector, a corner of the domestic stock market that is recognized for its relatively low volatility and relatively high distribution yields. Also, this ETF might be useful for developing low-risk equity exposure or for improving the current returns generated by the equity side of a portfolio.
With $15.40 billion in assets under management, XLU's top holdings include NextEra Energy Inc (NEE) with a 15.3% weighting; Duke Energy Corp (DUK) at 8.3%; and Southern Co (SO) at 7.4%. Over the past month, the ETF's fund flows came in at $714.56 million. In addition, its 0.10% expense ratio compares favorably to the 0.43% category average.
Closing the last trading session at $75.68, the ETF is currently trading slightly below its 52-week high of $77.23. XLU's NAV stands at $76.19. The fund has a five-year monthly beta of 0.49, indicating less volatility than the broader market. The fund has gained 5.7% year-to-date and 16.3% over the past six months.
XLU's POWR Ratings reflect this promising outlook. The ETF has an overall A rating, which equates to Strong Buy in our proprietary rating system.
XLU has an A grade for Trade and Buy & Hold and a B for Peer. Among the 13 ETFs in the A-rated Utility ETFs group, XLU is ranked #1. To see more of XLU’s component grades, click here.
Vanguard Consumer Staples ETF (VDC)
VDC provides targeted exposure to the U.S. consumer staples sector, making it quite suitable for investors seeking to buy and hold. It is a potentially useful tool for those implementing a sector rotation strategy or looking to shift their portfolio towards low beta holdings.
The fund has approximately $7.09 billion in assets under management (AUM). Procter & Gamble Company (PG) is the top holding of VDC, with a 13.2% weighting, followed by Coca-Cola Company (KO) and Costco Wholesale Corporation (COST), with 8.7% and 8.6% weightings, respectively.
VDC has a 0.10% expense ratio versus the 0.38 category average. Over the past month, the ETF's fund flows have come in at $30.47 million. The fund has a five-year monthly beta of 0.67, indicating less volatility than the broader market. The fund has gained 10.8% over the past year and 10.4% over the past six months.
Closing the last trading session at $202.19, the ETF is currently trading slightly below its 52-week high of $205.30. VDC's NAV stands at $202.41.
It is no surprise that VDC has an overall A rating, which translates to Strong Buy in our POWR Ratings system. It also has an A for Trade grade, Peer grade, and Buy & Hold grade. In addition, it is currently ranked #2 of 48 ETFs in the B-rated Consumer-Focused ETFs. To see more of VDC’s POWR Ratings, click here.
iShares U.S. Consumer Goods ETF (IYK)
IYK provides unique exposure to a slice of the domestic consumer market, emphasizing manufacturers of consumer goods while excluding consumer services. This methodology results in a mix of different sectors, including the heaviest weighting on consumer staples (though discretionary firms are also found in IYK).
The fund has $1.09 billion in assets under management. Its top holdings are Procter & Gamble Company (PG), with a 16.8% weighting, Coca-Cola Company (KO), with an 11% weighting, and PepsiCo, Inc. (PEP), with 10.5%. Over the past month, the ETF's fund flows have come in at $109.23 million. IYK's 0.43% expense ratio compares to the 0.38% category average.
Closing its last trading session at $207.49, the ETF is currently trading below its 52-week high of $210.29. IYK's NAV stands at $208.11. The fund has a five-year monthly beta of 0.96, indicating less volatility than the broader market. The fund has gained 3.7% year-to-date and 13.8% over the past nine months.
IYK's POWR Ratings are consistent with its promising outlook. The ETF has an overall A rating, which equates to Strong Buy in our proprietary rating system. It also has an A grade for Trade, Peer, and Buy & Hold. In the Consumer-Focused ETFs group, it is ranked #4. To see more of IYK’s component grades, click here.
XLU shares were trading at $75.89 per share on Tuesday afternoon, up $0.21 (+0.28%). Year-to-date, XLU has gained 6.73%, versus a -6.33% rise in the benchmark S&P 500 index during the same period.
About the Author: Spandan Khandelwal
Spandan's is a financial journalist and investment analyst focused on the stock market. With her ability to interpret financial data, she aims to help investors evaluate the fundamentals of a company before investing.
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