The best offense is a good defense

Tariffs in, tariffs out, geopolitics this, Trump that: When every headline about the economy is “who knows, anything could happen,” it’s probably time to rethink your investment strategy.

The pros are in agreement: Relying on AI growth stocks to carry your portfolio is so last year, and guarding against volatility is now the name of the game. Which means it’s time for defensive—not to be confused with defense—investments.

Sectors like healthcare, consumer staples, and utilities—which are considered defensive because they provide goods and services that are always necessary, no matter what happens to the economy—are already the best-performing of the year so far.

“Defensive sectors rallied amid volatility (Staples +5.6%, Health Care +1.4%, Utilities +1.2%), while Real Estate also rallied on lower rates (+4.1%),” explained Bank of America strategists in a recent note. Meanwhile, growth is out: “On the other hand, the top three growth sectors from last year all fell in February: Consumer Discretionary (-9.4%), Communication Services (-6.3%) and Tech (-1.4%) and are the worst performers YTD.”

These were also some of the same sectors that performed well during the 2018 trade war, the Bank of America analysts noted.

In defense of defensive picks

When growth stocks are dominating the market, of course everyone wants to ride the wave up. But when major banks are checking off more and more recession risks by the day, savvy investors search the corners of the market that are less reliant on the day-to-day ups and downs.

That’s why low beta—or less volatile—investments are in vogue at the moment. “Risk was in focus: The lowest beta quintile small caps outperformed the highest beta quintile by 11 percentage points. Utilities and Real Estate outperformed within both small and mid (and were the only sectors with positive returns in small caps), while Tech underperformed most [for the third consecutive month],” wrote BofA analysts.

Evercore analyst Julian Emanuel also picked out a slew of names in the Russell 3000 index that are low volatility. Some of the names include Apple, Abbvie, GoDaddy, CVS, Cigna, HP, among others.

Another way to play the moment is to look for defensive ETFs. Just yesterday, Goldman Sachs unveiled a timely set of three funds specifically designed to hedge against volatility. The so-called buffer funds operate by using derivatives to give investors some downside protection—which may be exactly what they need right about now.—LB