More Focused Defensive Index

The accompanying table includes an updated version of the ETF Innovators (ETFI) ETFI Highly Defensive PerformIdex of 36 companies based in the U.S., Canada, and Europe with market caps over $10B, which are the leaders by market cap in their defensive industry groups. This update includes a 10% reduction in the number of companies with an equal distribution of 12 each from consumer staples and healthcare, with the remaining 12 companies chosen from a variety of defensive industry groups.

(A) Mass Merchant Discount Retailer (1)

(B) Consumer Staples (12) – Non-Food/Beverage (2), Processed & Packaged Foods (3), Tobacco (2) (1 U.S. + 1 ex-U.S.), Alcoholic Beverages (1), Non-Alcoholic Beverages (2), Diversified Products (2)

(C) Telecom Services (4)

(D) Cable Television & Internet Access Providers (1)

(E) Utilities (2)

(F) Fast Food Restaurants (1)

(G) Commodities (2): Gold Mining (1) + Agri-Biotech (Seeds & Fertilizers) (1)

(H) Healthcare (12) – Top Seven Companies by Market Cap (7), Biotech (3) Medical Devices (excluding stents) (1), Generic Drugs (1)

(I) Aerospace (Non-Commercial) & Defense (1)

Over the past year, the index has outpaced its benchmark ETFs on a total return basis with a loss of 16.6%, including the Sabrient/Claymore Defensive ETF (DEF) (-34.6%), Consumer Staples Sector SPDR (XLP) (-18.3%), Healthcare Sector SPDR (XLV) (-31.3%), Utilities Sector SPDR (XLU) (-27.1%), Dow Jones Global Titans (DGT) (-39.7%), and the iShares Dow Jones Select Dividend (DVY) (-35.7%). Also, the equally-weighted defensive index is only 59% as volatile as the overall market with an average market cap of nearly $75B and above-market dividend yield of 3.4%, with a diversified mix of companies and industry groups chosen to outpace benchmark ETFs which focus on a single theme such as dividends, healthcare, or consumer staples.

Among the 36 component companies, I believe Altria Group (MO) and Pfizer (PFE) are defensive dividend, value buys at current levels as each company currently pays a dividend of $1.28 per share annually – resulting in bloated yields of 8.5% and 8%, respectively. Four companies in the index have posted gains on a total return basis (stock price change + dividend yield) over the past year despite unprecedented volatility and major market declines – including a diversified mix of Wal-Mart (WMT), General Mills (GIS), McDonalds (MCD), and Southern Company (SO).

In the healthcare sector, several companies have posted single-digit share price declines over the past year, demonstrating relative strength compared to major losses in the overall market and healthcare sector – including Amgen (AMGN), Genentech (DNA), Gilead Sciences (GILD), Abbott Labs (ABT), and Teva Pharma (TEVA). Among telecom services, AT&T (T), Verizon (VZ), Vodafone (VOD), and Telefonica (TEF) have an average dividend yield over 6%, but this was offset by an average stock price decline of nearly one-third.

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Comments

[granger:]

Great article, thanks for the ideas. I appreciate it.

2008 Dec 03 06:31 PM