However, they are more flexible and know their customers better than those “gringos” coming from North America. Buy America or buy local is not just a slogan that we have here in our countries. Fidelity is not recommending or endorsing this investment by making it available to its customers.
The most widely accepted definition of defensive stocks is that they tend to offer consistent earnings and dividends, whatever the market conditions are. FTXG makes an effort to match the price and yield performance of the Nasdaq US Smart Food & Beverage Index. It usually invests a minimum of 90% of its assets in the common stocks and depository receipts of companies’ part of the underlying index.
We think the digital channel remains an area of opportunity for consumer goods firms, as e-commerce penetration has been steadily increasing over the past decade. Retail spending through e-commerce grew 17.3% for the third quarter of 2019, far surpassing the 4.4% growth in total retail spending (Exhibit 3). In growth phases, personal income and personal spending tends to increase, leading to more purchases of consumer discretionary products. During contractions, personal income and personal spending are usually lower and spending on consumer discretionary products decreases.
Some categories in the sector are more conducive to moats than others, but Morningstar’s Matt Coffina, R.J. Hottovy, and Erin Lash say opportunities exist among beverage and tobacco firms. Get our industry-leading investment analysis, and put our research to work. Download the full report to find out more about how consumer behavior is evolving into the future. On the other hand, segments of the industrial sector, like transportation, may perform well due to evergreen demand.
- Interest rates can be an interesting metric to follow during all types of economic cycles.
- On the other hand, a 2% price gain in the market for one week leads to an expected increase of just 1% for the defensive stock with a beta of 0.5.
- It has $691.74 million in assets, while its net expense ratio is 0.43%.
- Any decline in interest rates could also boost the attractiveness of dividend-paying stocks.
- We think the digital channel remains an area of opportunity for consumer goods firms, as e-commerce penetration has been steadily increasing over the past decade.
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. 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.
Consumer Defensive Sector Realized Lukewarm Gains In Q4
Choosing defensive stock funds with holdings in a variety of sub-sectors within a given sector can make for less severe losses during a downturn. You can purchase defensive sector mutual funds or ETFs through a brokerage or investment firm. Before you bring these funds into your portfolio, figure out your asset allocation, or how your money will fall into different asset classes like stocks and bonds.Then, set up the portion of your portfolio that each asset class should represent so that your choice of stock will not be a disproportionate amount of the overall scheme. The utilities sector includes electric, gas, and water utilities, as well as companies that operate as distributors or producers of those utilities. Renewable energy sources like solar panels and wind turbines are also included.
Consumer Defensive News
It has $111.68 million in assets, while its net expense ratio is 0.60%. Its top three holdings are Coty Inc, Monster Beverage and McCormick & Co. The term describes products and services that are desirable for consumers, but not essential to their daily living. In other 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.
Examples of Defensive Stocks
So, our May 24 yield-based forecast for CONCY dogs, as graded by Wall St. wizards, was 40% accurate. Defensive sector funds refer to mutual funds or ETFs that mainly (or only) invest in the stock of companies that tend to remain stable through all phases of the economic cycle. So some potential downside guidance as well that led to some of the pressures in the space. 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.
Potential drawbacks
PBJ tracks the investment results of the Dynamic Food & Beverage IntellidexSM Index, which includes U.S. food and beverage companies. The fund normally invests at least 90% of its assets in the securities included in the underlying index. 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. FXG tries to match the price and yield performance of the StrataQuant® Consumer Staples Index. This fund normally invests at least 90% of its assets in the common stocks that are part of the index.
It’s one of the largest companies in the country by market capitalization and has an impressively global reach. The railway giant in the country is in the integrated transportation and logistic business. The bulk of its customers are in the wireless business (10.22 million), and the other 8.9 million are high-speed internet, TV, and wired telecom users.
It has $46.39 million in assets, while its net expense ratio is 0.29%. 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).
Defensive companies have attractive features for investors, employees, consumers, and national economies. Most of the advantages of defensive companies are direct results of their stability. One unknown—for both 2024 and the longer term—may be the impact of the new weight-loss drugs.
Also, avoid office building REITs or industrial park REITs, which could see defaults on leases rise when business slows. We also explore the increase in social commerce, as well as greater consumer concern around issues like sustainability, product origin, business practices, and more. Finally, we examine what makes for a positive shopping experience in the post-digital age. We conclude this report with key actions for brands and retailers to take in order to manage and adapt to the ongoing shifts in consumer behavior.
The reduced demand for consumer discretionary products is usually a precursor of lower sales for the companies that produce these products. Lower sales can lead to worsening economic conditions and greater economic contraction. Ten top consumer cyclical sector dogs were culled by yield for this report. Yield (dividend/price) results as verified by YCharts did the ranking. Two of five top dividend-yielding CONCY dogs were verified as being among the top ten gainers for the coming year based on analyst 1-year target prices.
Broad market ETFs that follow indexes like TSX and NASDAQ are not impervious to market crashes and recessions. “No risk, no reward.” That’s the first lesson every investor and trader should learn. Gordon Scott has been an active investor and technical analyst or 20+ years.
When exactly sales volumes pick up may depend on the health of the consumer and economy. However, valuations in the sector remain compelling, especially given the potential for improving profit margins. On top of selling “essential goods” (we could discuss how alcoholic and tobacco products are considered as essential another time), this sector also shows another great characteristic. Most of its industries have built their business model around repetitive sales. What’s better for a dividend investor than to find a business that keeps selling the same products to the same consumers every week?