Investors looking for relief from market volatility have had to deal with huge shifts in their investing strategies, as former investment favorites morph into money losers. Although the recent rally has helped many investors recover from some of their losses, stocks are still off sharply from their 2007 levels -- both here in the U.S. and around the world.
With uncertainty still all around, investors can't be blamed for seeking safety. Sectors that are traditionally identified as safe havens in uncertain times, such as health care and consumer staples, are worth looking at. Although these sectors fared fairly well during the bear market, there are clearly some significant differences between them.
Consumer staples
ETFs like the Consumer Staples Select Sector SPDR (XLP) and the Vanguard Consumer Staples ETF (VDC) hold stocks of companies within the consumer staples sector. The indexes the funds track include consumer products companies that fare well in difficult economic times, such as food and drug retailing, beverages, food products, tobacco, household products, and personal products.
The Vanguard and SPDR funds have similar low expense ratios. Furthermore, these funds hold similar portfolios of large-cap U.S. stocks, with Philip Morris International
Health care
Within the health-care sector, the PowerShares Dynamic Pharmaceuticals Portfolio (PJP) and the SPDR S&P Pharmaceutical ETF (XPH) both track indexes of pharmaceutical companies. Both funds include top names like Amgen
Fund facts
|
Fund |
Return (YTD) |
Expense Ratio |
Assets |
|---|---|---|---|
|
Consumer Staples SPDR |
15.2% |
0.21% |
$2.1 billion |
|
Vanguard Consumer Staples ETF |
17.5% |
0.25% |
$612 million |
|
PowerShares Dynamic Pharmaceuticals |
17.9% |
0.60% |
$58 million |
|
SPDR S&P Pharmaceutical ETF |
28.5% |
0.36% |
$59 million |
Source: Morningstar. Returns as of Dec. 24.
Fund prospects and risks
The argument for these sectors is pretty straightforward. Even though consumers can cut back on some consumer goods, the products made by companies within the consumer staples sector include basic necessities that most people don't cut back on even during economic downturns.
Similarly, the need for medical care doesn't go away when money is tight, and the industry makes products that are necessary for many consumers. Although some treatment and medications can be delayed, many are not optional. Demographics are often cited as creating a strong tailwind for pharma stocks, with baby boomers clearly at an age when they are heavy health-care consumers.
The pharmaceutical industry is one of the most profitable businesses and is distinguished by high profit margins and patent protection, which can protect a company's earnings for years. Still, even though these stocks have risen this year, they haven't seen the gains that hotter sectors like technology have enjoyed. Moreover, a thicket of laws and regulations impede new drugs from coming on line and thereby threaten earnings, and the looming specter of health-care legislation weighs over the entire industry.
Portfolio fit?
There are solid reasons for seeking safe harbors in uncertain markets. However, the sectors highlighted are no panacea even if the rally does come to an end. The funds that track these sectors are highly concentrated, so they should be sprinkled only lightly in most portfolios. The sectors do not all perform equally well, and it would be silly for investors to blindly plunge into these areas without comparing other available options.
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