Consumer Defensive Stock Performance

It has $86.30 million in assets, while its net expense ratio is 0.63%. Its top three holdings are Keurig Dr Pepper, Kraft Heinz and Mondelez International. 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. These consumers, however, still need to buy consumer staples—such essential and basic household items as toilet paper, paper towels, food, beverages, and gas. The consumer defensive sector has lagged market performance this quarter through Dec. 5, returning 3.8% compared with the market’s returns of 9.0% (Exhibit 1).

  1. For convenience and diversification purposes, you can buy a mutual fund that invests in them, such as the Vanguard Consumer Discretionary Index Fund Admiral Shares.
  2. Right now, we view the space as about fairly valued, slightly above 1 times under the price/fair value basis, but relative to other sectors certainly cheaper than most other sectors we cover.
  3. Defensive stocks should not be confused with defense stocks, which are the stocks of companies that manufacture things like weapons, ammunition, and fighter jets.
  4. Defensive sector funds are mutual funds or exchange-traded funds (ETFs) that invest in companies in recession-proof industries.
  5. These companies generate steady cash flow and predictable earnings during strong and weak economies.

Right now, we view the space as about fairly valued, slightly above 1 times under the price/fair value basis, but relative to other sectors certainly cheaper than most other sectors we cover. Among the best positioned for 2024 may be household products companies, due to sticky pricing, positive trends on sales volumes, and earnings flexibility. For example, Procter & Gamble () has used strong profit gains from the second and third quarters of 2023 to boost advertising, which means going forward it has flexibility to reduce ad spending, if needed, to meet its future profit targets.

iShares Evolved US Consumer Staples ETF (IECS, 33%)

For this analysis, I used FactSet’s economic sector classifications for the Russell 1000 with the sectors categorized as shown in the table below. These include makers of beauty and personal hygiene products such as Estee Lauder and Procter & Gamble. As such, they may not appeal to investors who seek rapid growth, or who are willing to take on a higher degree of risk for higher potential returns.

Molson Coors Beverage Co Class B (TAP) is around the top of the Consumer Defensive sector according to InvestorsObserver. TAP received an overall rating of 89, which means that it scores higher than 89% of stocks. Additionally, Molson Coors Beverage Co Class B scored a 96 in the Consumer Defensive sector, ranking it higher than 96% of stocks in that sector. For example, they may postpone vacations and delay the purchase of products that aren’t essential for daily living. These products might include high-end clothing, big-screen televisions, and expensive new cars.

Companies engaged in the manufacturing of food, beverages, household and personal products, packaging, or tobacco. Also includes companies that provide services such as education & training services. Although the economic outlook remains uncertain, consumers are likely to continue to need the everyday products—from toothpaste to toilet paper— that staples companies produce and sell.

“The world is moving from a petro-state to an electro-state,” Simmons says, such as with increasing adoption of electric vehicles. In conclusion, I think this is a time that greed is really winning out over fear in the marketplace. Consumer defensive names, which tend to be very high quality, a lot of wide moats to be found, are trading at relatively reasonable valuations, and I think this is a good time to take a look at this space.

Unfortunately, many investors abandon defensive stocks out of frustration with underperformance late in a bull market, when they really need them most. After a downturn in the market, investors sometimes rush into defensive stocks, even though it is too late. These failed attempts at market timing using defensive stocks can significantly lower the rate of return for investors. 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.

In the following charts, cyclical sectors are shown in blue and defensive sectors in green. The sector outperforms with the second-highest volatility of all sectors. To put additional perspective surrounding the outperformance of cyclical stocks, the Russell 1000’s total return for 2020 was 20.97%. Cyclical stocks returned 24.14% compared to defensive stocks with a 12.96% total return. However, looking at cumulative returns, cyclical stocks rebounded quickly and ran away the rest of the year.

Not all of these basic goods are defensive by default, but some can maintain stable prices during an economic decline. For instance, gold has historically produced a high return amid economic volatility because many investors see it as a safer alternative to stocks. Fidelity Select Gold Portfolio (FSAGX) is an example of a mutual fund that targets gold. A market correction occurs when the market declines between 10% and 20%. 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.

iShares US Consumer Goods ETF (IYK, 58%)

I think that’s a situation where they’re harnessing the potential of the emerging markets a lot better than they had in the previous years, and I think that will show in results over the next 12 to 18 months as well. PSL tries to match the investment performance of the Dorsey Wright® Consumer Staples Technical Leaders Index. It invests a minimum of 90% of its assets in the securities included in the underlying index. It has $111.68 million in assets, while its net expense ratio is 0.60%.

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Vector Group saw an increase in earnings per share from 0.32 in Q2 to $0.33 now. Its most recent dividend yield is at 7.46%, which has decreased by 0.07% from 7.53% in the previous quarter. This shift to online shopping has not only caused disruption for manufacturers, but also retailers with a large brick-and-mortar presence. As an example, we think the discount/dollar stores and off-price apparel sellers can withstand this threat, given their focus on convenience and small formats for the former and the hard-to-digitize treasure hunt for the latter. Discount/dollar stores tend to target lower-income customers, with 30% of customer households earning under $25,000 a year (for Dollar General specifically, but which we believe is a proxy for the space; Exhibit 4).

Healthcare Stocks

Consumer staples, also known as “consumer non-cyclical stocks,” tend to maintain more price stability in a down market than cyclical stocks. During an economic decline, consumers still need staples, such as cereal and milk, and they may even increase their use of so-called “sin stock” products, such as cigarettes and alcohol. Knowing this, some investors buy defensive sector funds, such as Vanguard Consumer Staples ETF (VDC), when they think a recession will occur. Key for the sector in 2024 may be whether sales volumes improve, with consumers coming back to more brand-name items. If volumes rise, consumer staples companies will likely feel less pressure to ease prices, which would in turn help profit margins.

These customers often must minimize absolute dollar costs, leading to repeat visits for smaller packaged necessities that can carry higher retailer margins, but would be costly to ship if ordered online. While evaluating tactical sector allocations for 2021, it is important to re-examine the year we just had and how fxopen review the uncertainty did not benefit defensive names as we’d normally expect. This may be because 2020 was anything but normal but may also indicate a larger shift to markets. As far as defensive names, medical companies working on vaccine development and TV/streaming services like Netflix stood out as outperformers.

This sector primarily includes companies dealing with household goods, food, beverages, hygiene products and other items. Basically, these are the products that are hard to eliminate from a budget even in times of financial trouble. So, investing in them is a relatively safer option, and one can invest in these stocks through mutual funds and ETFs. The Consumer Defensive sector comprises companies whose businesses are less sensitive to the economic cycle. These are products that people are unable or unwilling to cut out of their budgets regardless of the economic condition.

Apartment real estate investment trusts (REITs) are also deemed defensive, as people always need shelter. When looking for defensive plays, steer clear of REITs that focus on ultra-high-end apartments. Also, avoid office building REITs or industrial park REITs, which could see defaults on leases rise when business slows. “I’m looking for subsectors that are more consolidated, with high barriers to entry, less competition from private labels, and a better ability to raise prices,” he says. While utilities are often considered to be a sleepy part of the market, there’s been nothing sluggish about their performance this year.


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