The post Top Performing Defensive Stocks by Tony Dong appeared first on Benzinga. Visit Benzinga to get more great content like this.
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The S&P 500 index is regarded as the barometer of U.S. stock market performance. Composed of large-cap U.S. equities, the S&P 500 index is often used as a benchmark for professional and retail investors to compete against. When it comes to funds, the SPDR S&P 500 ETF (NYSEARCA: SPY) is the largest and most liquid exchange-traded fund (ETF) for tracking the S&P 500. Here are the best defensive stocks with low correlation to SPY.
One investment strategy with the potential to outperform over long periods is buying stocks that have a low correlation coefficient to SPY. This metric is primarily measured by the stock’s beta, which also incorporates measures of the stock’s volatility. The market (in this case, the S&P 500 or SPY) has a beta of 1.0, while stocks can have a beta of:
- Above 1.0, meaning that the stock generally moves in the same direction as the market and in a more volatile fashion
- Below 1.0 but higher than 0.0, meaning that the stock generally moves in the same direction as the market but in a less volatile manner
- At 0.0, meaning that the stock generally moves in a way uncorrelated to the movements of the market
- Below 0.0, meaning that the stock moves inversely to the market and in a more volatile fashion as it gets more negative
Quick Look at the Top Performing Defensive Stocks:
| Symbol | Company | % Change | Price | Dividend Yield | Invest |
|---|---|---|---|---|---|
| PG | Procter & Gamble |
+ 0.33%
|
$144.92 | 4.2272 / 0.03% | Buy stock |
| MRK | Merck & Co |
+ 0.34%
|
$120.70 | 3.4 / 0.03% | Buy stock |
| BMY | Bristol-Myers Squibb |
+ 0.36%
|
$60.87 | 2.52 / 0.04% | Buy stock |
| AMT | American Tower |
– 1.74%
|
$169.57 | 6.89 / 0.04% | Buy stock |
| GIS | General Mills |
– 0.03%
|
$37.21 | 2.44 / 0.07% | Buy stock |
| MCD | McDonald's |
+ 0.33%
|
$311.81 | 7.44 / 0.02% | Buy stock |
Table of contents [Show]
- Quick Look at the Top Performing Defensive Stocks:
- Deep Dive
- 1. Procter & Gamble Co. (NYSE: PG)
- 2. Merck & Co. Inc. (NYSE: MRK)
- 3. Bristol-Myers Squibb Co. (NYSE: BMY)
- 4. American Tower Corp. (NYSE: AMT)
- 5. General Mills Inc. (NYSE: GIS)
- 6. McDonald’s (NYSE: MCD)
- Pros of Low-Correlation Investing
- Lower Market Risk
- Lower Volatility
- Better Portfolio Risk-Adjusted Returns
- Pros of Investing in Defensive Stocks
- Counter-Cyclical Performance
- Dividend Yield
- Psychological Ease
- Where to Buy
- Frequently Asked Questions
Deep Dive
The following defensive stocks all have a low correlation coefficient (beta of 0.50 or under) compared to the SPY. In addition, these stocks exhibit sound fundamentals in the form of positive return on equity; return on assets; return on investment; and gross, operating and net margins. They also have positive historical earnings and revenue growth. A combination of quality characteristics plus a lower-than-average beta makes these stocks potential defensive picks.
1. Procter & Gamble Co. (NYSE: PG)
With a market cap of $330 billion, PG is one of the largest consumer defensive companies in the world. The company provides an array of essential products to consumers worldwide via five segments: beauty; grooming; healthcare; fabric and home care; and baby, feminine and family care. PG has achieved a strong network effect through its robust distribution network consisting of mass merchandisers, e-commerce, grocery stores, membership club stores, drug stores, department stores, distributors, wholesalers, specialty beauty stores and pharmacies.
2. Merck & Co. Inc. (NYSE: MRK)
Merck is a company operating through two main healthcare sectors: pharmaceuticals and animal care. For the former, MRK offers various human pharmaceutical products related to oncology, immunology, neuroscience, virology, cardiovascular and diabetes. For the latter, MRK discovers, develops, manufactures and markets veterinary pharmaceuticals, vaccines and health management services such as identification and tracking devices. Worldwide, MRK collaborates with other healthcare companies to develop and commercialize vital medications, including HIV/AIDS treatments.
3. Bristol-Myers Squibb Co. (NYSE: BMY)
BMY is another long-standing healthcare company known for developing, licensing, manufacturing and marketing various pharmaceutical products. Notable examples include its cancer treatments, which treat lymphoma, myeloma and leukemia. The company sells products not only to wholesalers but also directly to pharmacies, hospitals, clinics and government agencies.
4. American Tower Corp. (NYSE: AMT)
AMT is one of the largest North American-based real estate investment trusts (REITs). The company boasts a portfolio of around 219,000 cellular communications sites, from which it gains lease income tied to the performance and growth of the communications sector. Its major lessees include AT&T Inc. (NYSE: T) and T-Mobile US Inc. (NASDAQ: TMUS). Despite falling hard during the 2000 dot-com bubble, the company has rallied strongly in recent years thanks to the 5G boom.
5. General Mills Inc. (NYSE: GIS)
GIS was incorporated in 1928 as a flour miller. Over the century, the company has expanded to become one of the largest suppliers of cereals and pre-packaged foods worldwide. GIS is known for its large selection of products, with famous brands such as Fruit Gushers, Cinnamon Toast Crunch, Cocoa Puffs, Nature Valley, Pillsbury, Yoplait, Wheaties and Cheerios being pantry staples across America. The company distributes products via a robust network of grocery stores, mass merchandisers, membership stores, natural food chains, e-commerce, convenience stores, pharmacies and discount retailers. Currently, the company has a five-year monthly beta of 0.32, making it a third as volatile as the overall market. Since 1993, GIS has outperformed the SPY with a CAGR of 9.81% compared to 9.72% with all dividends reinvested.
6. McDonald’s (NYSE: MCD)
Founded in 1940 and headquartered in Chicago, Illinois, McDonald’s operates and franchises McDonald’s restaurants in the United States and internationally, where the company offers hamburgers and cheeseburgers, chicken sandwiches and nuggets, fries, salads, shakes, frozen desserts, sundaes, soft serve cones, bakery items, soft drinks, coffee and beverages. There’s also a breakfast menu, including muffins, sausages, biscuit and bagel sandwiches, oatmeal, hash browns, breakfast burritos and pancakes. A solid diversification benefit of having McDonald’s in your portfolio is it can provide considerable resilience to business cycles and unforeseen market drawdowns.
Pros of Low-Correlation Investing
Investing in low-correlation stocks can be a good way to insulate your portfolio from the broader market’s movements. For investors with lower risk tolerance, investing in low-correlation stocks can help reduce volatility and ensure a more consistent sequence of returns. It can also help protect previous investment returns and reduce drawdowns, which is how large a peak-to-trough loss is for an investment portfolio.
Lower Market Risk
Market risk is the risk that volatility in the broader stock market can affect the value of your investments. Market risk is unavoidable unless you only hold cash, but it can be mitigated by holding stocks with a low correlation coefficient to the SPY. For example, while the S&P 500 lost over 16% in 2022 from inflation and Federal Reserve rate hikes, all the stocks mentioned earlier (except for AMT) have returned positive so far thanks to their lower beta. During the 2020 COVID-19 crash, most of these stocks plunged less too, albeit still more than Treasury bonds.
Lower Volatility
Low beta stocks tend to also have a lower standard deviation. This is the amount that a stock has historically moved around its average. For example, a stock that has returned 10% over the last decade with a standard deviation of 20% has fluctuated in value between -10% to 30% at times. Keeping standard deviation low by picking low-beta stocks can help your investment compound at a steadier rate without the violent ups and downs. Over the long term, keeping unrealized losses minimized can play an important role in increasing total returns. To illustrate this, consider how a 33% loss from $100 to $66.66 requires a subsequent 50% gain of $33.33 to break even again.
Better Portfolio Risk-Adjusted Returns
Modern Portfolio Theory states that a portfolio of uncorrelated assets with positive expected returns can produce more return for less risk compared to a single asset. For your asset allocation plan, incorporating low correlation into a diversified portfolio of stocks, bonds, cash and alternatives can help investors optimize their risk-adjusted returns further by dampening volatility without sacrificing performance. Often, adding low stocks with a low correlation to SPY or the broad market can increase a portfolio’s Sharpe ratio, a measure of risk-adjusted returns.
Pros of Investing in Defensive Stocks
Defensive stocks are those with traits that help them endure during difficult economic or market conditions. Often, this translates into a competitive business advantage that ensures their margins, revenue and earnings stay healthy. Defensive stocks tend to be found in the consumer staples and healthcare industries because of their evergreen demand and essential nature. Investing in these stocks can be desirable for investors with a lower risk tolerance or shorter time horizon.
Counter-Cyclical Performance
Defensive sectors like healthcare and consumer staples tend to lag during low-interest rate bull markets but can strongly outperform during times of high inflation or rising interest rates. GIS, MRK, BMY and PG all returned positive in 2022 (as of September) despite the broader market being in the red. Of these stocks, both MRK and BMY are healthcare sector companies, while GIS and PG are consumer staples. The evergreen demand and essential nature of these companies help ensure their revenues, earnings and margins stay relatively intact during times of economic stress.
Dividend Yield
Investors looking for higher-than-average income might like defensive stocks. Because defensive stocks are often those of mature, blue-chip companies, they tend to have surplus cash reserves that they pay out quarterly to investors as a dividend. Often, the dividend yield from these companies exceeded the average offered by the SPY ETF. Dividends from U.S. companies are generally taxed at a more favorable rate, making them tax efficient. Reinvesting these dividends plays an important role in compounding total returns.
Psychological Ease
Prolonged bear markets are difficult to endure for even experienced investors. Having some stocks that remain in the green while the overall market is in the red can be a much-needed psychological boost for investors. Investors who need to withdraw money from their portfolios for income can sell shares of these companies first to avoid locking in an unrealized loss. This can sometimes mean the difference between staying the course and remaining invested instead of capitulating and panic-selling.
Where to Buy
Investors looking for further insights and reviews of defensive low-correlation stocks can use Benzinga to compare the available options. Here is also a list of brokers where you can invest in defensive stocks.
Interactive Brokers is a comprehensive trading platform that gives you access to a massive range of securities at affordable prices. You can buy assets from all around the world from the comfort of your home or office with access to over 150 global markets. Options, futures, forex and fund trading are also available, and most traders won’t pay a commission on any purchase or sale.
IBKR is geared primarily toward experienced traders and investors but now with the availability of free trades with IBKR Lite, casual traders can also acclimate to IBKR’s offerings.
- Access to international markets
- Active traders
- Detailed mobile app that makes trading simple
- Wide range of available account types and tradeable assets
- IB SmartRouting provides significant price improvement vs. industry
- Fractional trading allows investing regardless of share price
- Industry’s lowest margin rates
- Earn more by lending your fuly-paid shares
- Beginner investors might prefer a broker that offers a bit more hand-holding and educational resources
80% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.
Plus500 is an online CFD broker focusing on contracts for difference (CFDs). CFDs are similar to binary options in the U.S. where traders take all-or-nothing speculation on the prices of certain securities like indices, commodities or currencies. While not legal to trade in the U.S., CFDs are legal in many jurisdictions across the globe and Plus500 offers a wide array of tradable markets using these instruments.
Plus500 doesn’t charge commission and only profits off the spread, which is the difference between the buy and sell price of a specific security. But Plus500 is not a broker for beginners — the education materials are sparse and CFDs are risky derivatives capable of sapping out all of an investor’s capital. Only trade these instruments if you understand how they operate and the risks involved with buying them.
The Plus500 CFD platform is for CFDs. The Plus500 Futures platform offers futures for U.S. customers, and Plus500 Invest offers stock trading.
- Traders looking for a smooth mobile experience
- Great mobile app
- Low spreads and commissions
- Unlimited demo account
- Only derivatives are available
- Not open to U.S. residents
Public is the only investing platform that lets you trade stocks, ETFs, crypto, bonds, options and alternative assets—like fine art and collectibles—all in one place. Public also provides access to custom company metrics, live shows about the markets, and insights from a community of millions of investors, creators, and analysts.
Today, Public provides more ways to create a diversified portfolio than nearly any other online broker. Members can engage in sophisticated investing strategies and access a wealth of investing insights—from company-specific analysis to live audio shows and town hall-style Q&As. In addition, Public offers a premium membership tier with unique company KPIs, detailed performance metrics, and institutional-grade research.
- Stock and ETF investors
- Crypto investors
- Investors looking to diversify with alternative assets or bonds and options
- Commission-free stock and ETF trading
- Fractional share investing
- Advanced data, tools, and insights with Public Premium
- You can’t transfer crypto to another wallet
- No mutual funds or precious metals
- At this time, only offers individual brokerage accounts and not IRAs
Robinhood is a popular trading platform known for its commission-free trades and user-friendly mobile app. Ideal for novice investors, Robinhood makes it easy to buy and sell stocks, ETFs and cryptocurrencies. The platform offers a straightforward, no-frills experience, making it accessible for users new to investing. With features like fractional shares and a sleek interface, Robinhood lowers the barriers to entry for investing, allowing users to start with just a few dollars. It lacks the advanced tools and research options that more experienced investors might seek. Overall, Robinhood is a great choice for beginners seeking a simple way to invest.
- Beginners looking for simplicity
- Mobile-first investors
- Commission-free trades
- User-friendly mobile app
- Instant double
- Cash management
- Access to cryptocurrencies
- Limited research tools
- No mutual funds available
- Basic customer support options
TradeZero is an online broker and free stock trading platform that provides everything you need to successfully share and trade, including round-the-clock customer support. TradeZero provides four different trading state-of-the-art software programs with its services, a locator for sourcing shares for shorting, commission-free trades, and real-time streaming, to name a few of the features promoted on their website. The software is a unique and (potentially) affordable option for anyone interested in stock trading.
- Traders seeking high transparency and mobility in a stock trading program
- Those attracted to commission-free trades
- Those seeking a free version of a high-quality trading program
- 24/7 live customer support
- Uses ZeroWeb technology, a powerful level 2 online platform with direct market access
- Mobile app allows users to access stocks and trade in real-time while on the go
- Enforces Pattern Day Trading restrictions (accounts need to maintain a daily equity balance of at least $25k)
- Mobile app could offer more features
Frequently Asked Questions
Are defensive stocks low risk?
Defensive stocks are considered lower risk compared to the broader market but should not be interpreted as being “low risk” compared to other asset classes, such as bonds or cash. Even the most robust blue-chip, low-beta stock with less volatility can still tank sharply during a broad market crash. As with investing in all stocks, a degree of market risk is unavoidable. Moreover, investors need to be aware of idiosyncratic risk, which is the risk of loss in their investment because of changes in the company’s fundamentals or outlook. Even the most solid of defensive stocks can suffer changes in management, poor sales or a scandal that causes their share price to sharply drop.
What is a low correlation for stocks?
In general, stocks that have a low correlation to the market exhibit a historical beta of less than 0.50. Between 0 to 0.50, stocks will still move in the same direction as the overall market, but to a muted and more infrequent degree as beta gets lower. When beta goes negative, the stock has historically moved in the opposite direction of the stock market. A good way to screen for stocks with a low correlation to the market is by looking for those with a beta between 0 to 0.50. Keep in mind that the beta will depend on the historical period under consideration, so testing a varied sample is a good idea.
Are defensive stocks a good investment?
Whether or not defensive stocks are a good investment depends on an investor’s objectives, risk tolerance and time horizon. For example, a young investor with many years until retirement may opt for a portfolio of growth stocks or a broad-market index fund. This investor can tolerate some volatility in exchange for the potentially higher returns taking on additional risk brings. Thus, the investor may not want to limit themselves to low-correlation defensive stocks, which might severely restrict their stock picks by ignoring certain sectors (like technology stocks) or market caps (like small cap stocks). On the other hand, a retiree might opt for their stock allocation to be composed of low-correlation defensive stocks. For this investor, keeping volatility minimized is critical for ensuring the protection of principal and a safe withdrawal rate.
The post Top Performing Defensive Stocks by Tony Dong appeared first on Benzinga. Visit Benzinga to get more great content like this.
