Cyclical vs. defensive stocks: Here's how to invest
Yahoo Finance Markets and Data Editor Jared Blikre, who also hosts Yahoo Finance's Stocks in Translation podcast, explains how investors can play both sides using sector exchange-traded funds (ETFs).
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The S&P 500 is up nearly 30% off the April lows and Wednesday we took a look at cyclicals versus defensive sectors and how those poor defensive have gotten no love recently. Today I'm going to show you how to play these two different groups with an introduction and a way to enhance your portfolios with commodity futures. But first, let's do a brief recap of some of the basics that we covered yesterday. First, we want to take a look at the defensive sector definition. These are industries whose demand stay steady in booms or busts so that earnings and share prices move less with the economy. They're stable, in other words. And these we have four sectors, consumer staples, we have healthcare, utilities, and energy, and yes, energy is kind of a gray area, but we talked about that yesterday. Now we also have the cyclicals. These are industries and groups whose sales and profits swell in economic expansions, they shrink in recessions, and that makes their stocks swing more than the general market. And here we have the remaining seven sectors, uh, large cap sectors, at least that we define the S&P 500 by, consumer discretionary, industrials, materials, financials, tech, communication services and real estate. And yes, there are some gray areas there too, especially with tech and communication services, but we move on. I just wanted to show this chart again too because I think it's so incredible. This goes back to 1990 and this shows you the defensive sectors, how much they took up as part of the S&P 500, they started out at 40% in 1990. They moved up a little bit, but now they are at 20%. And then you took take a look at two stocks only. This is Nvidia and Microsoft and they are now taking up 15%. So this just this just illustrates how much these stocks have become unlove, those defensive sector stocks. So as promised, I'm going to show you some ETFs on how to play. And by the way, a lot of this work comes from Todd Sohn over at Strategas ETF Research, and these are his basket years. So here we have a bunch of cyclical ETFs starting with ARKKQ. That is the Arc autonomous and, uh, innovation fund, not the innovation, the Arc autonomous and robotics fund. That is up over 66%, that's twice what the S&P 500 is up. And then we have two, uh, ETFs that cover the semiconductors, socks, which you might know, and XSD. Both of those are also up almost 2x, the S&P 500. Then we have high beta. That's up 50%. What is beta? That's almost like the stock trading at a multiple of the general market. So a beta of two is twice what the S&P 500 is doing. Those are doing well, those are cyclicals. And then it's interesting, we have a broker-based ETF. That's up 43%. Uh, and here's the year to date, still holding on the gains of 21%. So we do have financials in there. Then we have another one, KBW Bank Index. That's another financial driven one. Then we've got some other interesting ones. We've got Pave, which is infrastructure, and also we have IWM down there. You might know that as the Russell 2000 ETF. So that's a very cyclically oriented index, um, and you can also break that up into groups. But we got to get to some of our defensives here. So, PKW is a buyback fund and so the top two in there, I believe are Wells Fargo and PayPal. And yes, this is a defensive, but two of those stocks are arguably cyclical. So it just goes to show you some of the gray area that we're dealing with here, but, uh, stocks that can do strong buyback programs, they have to, they have a bit of defensiveness worked into them. Also, we have the RSP. That is the S&P 500 equal weight ETF. Since the market cap ETF is so highly weighted to those big stocks, uh, this one is arguably a bit more defensive. You can see that's up 7% year to date. Then we have cows. This is a cash cows ETF. Um, you'll see stocks like Nike and Ford at the very top of that. The theory being that cash flows, those strong cash flows make those stocks a little bit more defensive, even though a lot of times they're classified as cyclical. At the very bottom, the worst performer, XLV. That is a standard Spider Healthcare ETF for large cap healthcare and pharmaceuticals. That's only up about 2.2% since the April bottom. And it looks like I'm out of time here, so I'm going to have to show you how to add managed futures to your portfolio and help balance it tomorrow. But I do promise to do that. In the meantime, tune into the Stocks and Translation Podcast for more market decoding deep dives. New episodes can be found Tuesday and Thursday on Yahoo Finance's website or wherever you find your podcast.
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