Exchange-traded funds offer a convenient way to invest in sectors or niches that interest you. If you expect the economy to keep freaking us all out for the foreseeable future and you'd like to invest in solid defensive companies that tend to hold up in all kinds of environments, the Guggenheim Defensive Equity ETF (NYSE: DEF ) could save you a lot of trouble. Instead of trying to figure out which companies will perform best, you can use this ETF to invest in a lot of them simultaneously.
ETFs often sport lower expense ratios than their mutual fund cousins. The Guggenheim ETF's expense ratio -- its annual fee -- is 0.65%, which is a bit higher than many ETFs, but still considerably lower than the typical stock mutual fund. The fund is fairly small, too, so if you're thinking of buying, beware of occasionally large spreads between its bid and ask prices. Consider using a limit order if you want to buy in.
This ETF has outperformed the S&P 500 since its inception in 2006. As with most investments, of course, we can't expect outstanding performances in every quarter or year. Investors with conviction need to wait for their holdings to deliver.
With a low turnover rate of 32%, this fund isn't frantically and frequently rejiggering its holdings, as many funds do.
What's in it?
Plenty of defensive companies had strong performances over the past year. Sherwin-Williams (NYSE: SHW ) , for example, surged 58%. It has had its rating cut by at least one Wall Street analyst, but that's most likely due to valuation concerns instead of performance worries. It might not seem like the most defensive company, as sagging economies often feature soft housing markets, with fewer homes to spruce up with paint -- but the company also serves commercial and industrial markets. Even in a down economy, if airplanes have been ordered and are being built, they'll need to be painted. It's also growing in developing economies such as Brazil.
Duke Energy (NYSE: DUK ) , meanwhile, gained 29%. Utilities are a classic defensive business, for no matter what the economy is doing, we all want electricity to keep our refrigerators humming and the lights on. The company has been benefiting from low natural-gas prices and is generating electricity via diversified means, such as hydroelectric power and wind power, and is boosting its involvement in renewable energies.
Other companies didn't do as well last year, but could see their fortunes change in the coming years. Annaly Capital Management (NYSE: NLY ) shed 5%, for example, but it's also sporting a whopping 13% dividend yield. It makes money investing in mortgage-backed securities and is seen as employing less risk than some of its peers. Still, there is some risk, as it benefits from low interest rates and those will likely rise one of these days. Mortgages are defensive because as long as you can afford to keep making them, your monthly payments are not optional.
PepsiCo (NYSE: PEP ) may be a specialist in fizzy drinks, but its stock has been flat over the past year. It's defensive, though, because while financially pressured consumers might put off buying that new washing machine or car, they'll likely keep quaffing their favorite drinks and soothing their frayed nerves with pretzels. The company has been growing its revenue by an annual average of about 13% over the past five years, and its earnings by about 4%. It's also expanding around the world, such as via its acquisition of Russian company Wimm-Bill-Dann. Shareholders might be impatient for more stock movement, but while they've waited, PepsiCo has yielded about 3.2%, and has a five-year average dividend growth rate of more than 10%.
The big picture
A well-chosen ETF can grant you instant diversification across any industry or group of companies -- and make investing in and profiting from it that much easier.
Defensive stocks can help you sleep at night. So can the companies our analysts present in our special free report, "3 American Companies Set to Dominate the World."