The stormy days of the 2022 bear market may be behind us, but the unpredictable nature of financial markets means there’s always another cloud on the horizon.
History and market mechanics have shown us that while a sudden market crash might pull everything down indiscriminately, bear markets — characterized by prolonged downturns — can be more selective in their impact.
It’s crucial to understand that not all sectors feel the weight of a bear market equally. Sectors with a high “beta” — a measure of a stock’s volatility in comparison to the overall market — can experience sharp declines.
Technology and consumer discretionary sectors often fit this bill; they might surge during booms but can plummet swiftly during downturns.
In contrast, low-beta sectors, typically more resistant to market swings, can stand firm or even flourish during such turbulent times.
Sectors like utilities and consumer staples are often seen as defensive bastions. Their essential nature means that, come rain or shine, there’s a consistent demand for their offerings.
As we navigate the uncertain waters ahead, Canadian investors can find solace in certain safe harbours. Let’s spotlight two exchange-traded fund (ETF) picks designed to target these defensive sectors.
Consumer staples: Keeping you fed
Consumer staples are those essential items we use daily, regardless of how the economy is doing. Think of things like food, beverages, household and personal care products.
So, companies in the consumer staples sector are those that produce or sell these everyday necessities — from the brand behind your morning coffee to the company making your toothpaste or laundry detergent.
What makes this sector “defensive?” It’s quite straightforward: no matter what’s happening in the economy — whether it’s booming or in a slump — people still need to eat, drink, and take care of their homes.
Because of this consistent demand, consumer staples companies tend to have stable revenues, making them less susceptible to economic downturns.
In simple terms, while you might cut back on luxury items or big-ticket purchases during tough times, you’re still going to buy bread, milk, and soap. That’s why the consumer staples sector can be a safer bet during economic uncertainties.
For exposure to Canadian consumer staples stocks, I like iShares S&P/TSX Capped Consumer Staples Index ETF, which holds 11 of the largest TSX consumer staples stocks.
Utilities: Keeping your lights and water on
Utilities are the essential services we rely on daily. Companies in the utilities sector provide these basic services — they’re the ones running power plants, maintaining the water supply, or ensuring that gas reaches our homes.
What makes this sector “defensive?” Again, it boils down to necessity. No matter the state of the economy, people need to turn on lights, heat their homes, and have access to clean water. As a result, these companies usually have a steady stream of income, as their services are always in demand.
In simple terms, just as you continue buying groceries, regardless of economic ups and downs, you also don’t stop using electricity or water. This constant need makes the utility sector a stable choice during uncertain economic times.
For exposure to TSX utility stocks, I like BMO Equal Weight Utilities Index ETF, which holds 16 utility stocks in equal proportions and currently has a 4.69% annualized distribution yield with monthly payouts.
