This allows them to perform better than the broader market during a market correction or a bear market. Defensive stocks offer the substantial benefit of similar long-term gains with lower risk than other stocks. Defensive stocks as a group have a higher Sharpe ratio than the stock market as a whole.
- Utilities, consumer staples, and healthcare represent the main defensive sectors.
- It is nonetheless closely tied to the health of the economy and consumer spending trends.
- The performance of consumer cyclicals is highly related to the state of the economy.
- After all, health is a primary concern, and people still visit doctors and refill their prescriptions even when they can’t afford other goods.
- When looking for defensive plays, steer clear of REITs that focus on ultra-high-end apartments.
- In times of economic uncertainty, consumer staples stocks are less impacted than discretionary stocks, making them a more conservative investment.
Many investors include defensive stocks in their portfolios to counterbalance potential losses from more volatile securities. Opinions about what percentage of your portfolio you should invest in defensive stocks vary wildly. Ultimately, it’s a personal decision based on your long-term goals and tolerance for risk.
The latter covers all the things people need daily, such as food and hygiene products, so the sector’s fortunes are perceived to be fairly consistent. Staples stocks therefore tend to have more consistent earnings, lower volatility and growing dividends, compared with discretionary stocks. Consumer cyclical companies, also referred to as consumer discretionary companies, are particularly exposed to fluctuations in consumer spending.
Although its sole exposure to the challenged cereal category and its small scale have diminished the firm’s standing with retailers and suppliers, we see a path to higher profits. Our analysts put stock market performance trends, along with bonds and funds, into perspective—and look ahead with a fresh market outlook for 2024. We see opportunities in consumer packaged goods, where nearly 60% of our coverage trades in 4- or 5-star territory.
What Are Defensive Sector Funds?
When comparing offers or services, verify relevant information with the institution or provider’s site. Even though the consumer staples sector will likely always be around, they face unique challenges today. Companies that supply these types of goods bitbuy review and services are usually either called consumer discretionaries or consumer cyclicals. The 10-year annualized return of the MSCI World Consumer Discretionary Index was 10.25% through March 31, 2023, compared to 8.85% for the MSCI World Index.
In a recession, consumers tighten their belts, but they’re not likely to stop paying their electric bill, buying groceries, or skipping their prescriptions unless dire circumstances require it. Both consumer discretionary and consumer staples sectors have an index of their respective stocks on the S&P 500, and each has an ETF that mirrors their performance. XLY is the Consumer Discretionary Select Sector SPDR (Standard & Poor’s Depository Receipt) ETF, while XLP is the Consumer Staples Select Sector SPDR ETF. These ETFs provide a way for investors to measure, track and invest directly in a representative basket of consumer discretionary or staples stocks. While consumer discretionary and consumer staples both cover industries that involve people buying things, they’re not the same.
Consumer Staples
Defensive stocks should not be confused with defense stocks, which are the stocks of companies that manufacture things like weapons, ammunition, and fighter jets. The demand for consumer discretionary stocks normally increases or decreases as the economy grows or weakens. And since consumers typically purchase bdswiss review non-essential goods when they have discretionary income, anything else that threatens that income, such as lower wages or increasing prices, may also affect stock values. The reduced demand for consumer discretionary products is usually a precursor of lower sales for the companies that produce these products.
What are consumer staples stocks?
The consumer discretionary sector of the economy consists of manufacturing and services industries with consumer discretionary companies. Normally, these companies and their industries are sensitive to changing economic conditions. The term describes products and services that are desirable for consumers, but not essential to their daily living. In other dowmarkets words, rather than having to buy these products because they are necessities, they have the freedom to decide—the discretion—to purchase them, or not. Consumer discretionary purchasing usually increases when consumers have more money to spend. The purchase of consumer discretionary products is often compared with the purchase of consumer staples.
How to invest in the consumer staples sector
The return on defensive stocks is usually slow and steady, as are dividends if the company pays them, which can make it easier to predict how your investments will grow over time. That might be appealing if you’re working toward a specific financial goal or planning for retirement. The consumer discretionary sector’s manufacturing segment includes automotive, household durable goods, textiles & apparel and leisure equipment.