Better Late Than Never: Playing Defense

Conventional wisdom suggests that you hold more defensive stock sectors during turbulent times. Traditionally, this means investing in health care, utilities and consumer staples, while avoiding technology, financials and the economically sensitive consumer cyclical segment.

The losses across all stocks are so demoralizing, it's hard to make a substantive case for having had exposure to any equity position. However, if losing less is the name of the rose, then conventional wisdom on defensive equity investing has held.

Traditional Equity Safer Havens		Year-to-date		Bull Market "Faves"		Year-to-date
Health Care (XLV)		-28%		Cyclicals (XLY)		-41%
Utilities (XLU)		-32%		Technology (XLK)		-44%
Staples (XLP)		-19%		Financials (XLF)		-56%
Equal-Weighted Average		-26%				-47%

Looked at another way, a 26% loss requires a 35% to reclaim the 2007 highs. Meanwhile, a 47% loss requires an 89% bull market run to return to glory.

The bear market math here is very important; that is, for those who prefer a bit less roller-coaster in their equity endeavors, smaller losses don't require the better part of 5-7 years. In contrast, a so-called long-term investor who stayed loyal to the most volatile segments is looking at Everest.

It does make one wonder why an exchange-traded fund hadn't yet captured a defensive equity index sooner. Nevertheless, Claymore does have the Sabrient Defensive Equity Index ETF (DEF).

As of Q3 end, DEF has roughly 50% invested in the traditional defensive areas mentioned above. Admittedly, that's a heavy weighting for things like staples and utilities.

However, lest we believe that DEF is the answer to "tough time" equity exposure, we have to recognize that the fund is based largely on a historical paradigm; specifically, energy has often been a safer haven in the past. That explains its 17% weighting here. (Energy year-to-date, however, is down -40%.)

The Sabrient Defensive Equity Index ETF (DEF) certainly has potential if one prefers an all-in-one solution. Yet a quick look at the fund's current weightings show that, in the current bear, it has not significantly outperformed the SPDR S&P 500 Trust (SPY) by more than a few percentage points.

Losing less is key, but losing a little bit less isn't a game-changer. If you have enough investing savvy, you might prefer selecting those defensive areas on your own, like SPDR Staples (XLP) and SPDR Utilities (XLU).

Disclosure Statement:  Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. 

Comments

[iknoknot:]

thanks - interesting read, good sector list to add to the mental "post-its"

--ikk

2008 Nov 18 01:28 AM