Getting Defensive With Sector ETFs

With the S&P 500 off nearly 5 percent from its recent highs, some fund analysts are recommending defensive sectors, such as consumer staples and health care.

In a note out Monday, CFRA Research boosted its ratings on the defensive consumer staples and health care sectors while lowering its ratings on the cyclical energy and materials sectors.

What Happened

As has been widely noted, the health care sector is struggling this year. Amid political headline risk regarding Medicare For All and bipartisan efforts to push pharmaceuticals prices lower, the Health Care Select Sector SPDR XLV, the largest health care ETF by assets, is up just 2.77 percent year-to-date compared to a gain of 15.28 percent for the S&P 500.

“CFRA finds opportunity within the Health Care sector,” said CFRA's Director of ETF & Mutual Fund Research Todd Rosenbluth in the note. “Trading at 15.7x on a forward P/E basis, it is below its historical average of 17.0x. In the first quarter of 2019, 75% of companies in the health care sector beat both sales and earnings estimates, for the best performance in the S&P 500 index.”

CFRA notes health care, the second-largest sector weight in the S&P 500, often outperforms the broader market in the seasonally weak May through October period.

Why It's Important

The research firm has an Overweight rating on XLV, which allocates over 48 percent of its weight to the pharmaceuticals and biotechnology industries.

“Biotech and pharmaceutical companies account for 48% of the market capitalization of the sector and CFRA thinks the drug pipeline, approval time reductions and merger-and-acquisition activity make these industries very attractive,” said Rosenbluth.

CFRA also has an Overweight rating on the Vanguard Consumer Staples ETF VDC, which has been trading better than the broader market this month. VDC is a large-cap, cap-weighted consumer staples ETF with significant exposure to familiar names, such as Procter & Gamble PG, Coca-Cola Co. KO and Walmart Inc. WMT.

What's Next

“CFRA is also raising the S&P 500 Consumer Staples sector to Marketweight from Underweight,” said Rosenbluth. “While several staples companies have announced plans to reduce or eliminate dividends, the sector’s dividend yield remains near 3.0%. As the seasonally slow summer begins and trade uncertainty weighs on investors, the sector could see in-line performance.”

VDC's dividend yield is 2.62 percent.

Related Links:

Time For These China ETFs

Consider This Small-Cap ETF

Posted In: CFRA ResearchTodd RosenbluthAnalyst ColorLong IdeasSector ETFsHealth CareTop StoriesAnalyst RatingsTrading IdeasETFsGeneral

Ad Disclosure: The rate information is obtained by Bankrate from the listed institutions. Bankrate cannot guaranty the accuracy or availability of any rates shown above. Institutions may have different rates on their own websites than those posted on The listings that appear on this page are from companies from which this website receives compensation, which may impact how, where, and in what order products appear. This table does not include all companies or all available products.

All rates are subject to change without notice and may vary depending on location. These quotes are from banks, thrifts, and credit unions, some of whom have paid for a link to their own Web site where you can find additional information. Those with a paid link are our Advertisers. Those without a paid link are listings we obtain to improve the consumer shopping experience and are not Advertisers. To receive the rate from an Advertiser, please identify yourself as a Bankrate customer. Bank and thrift deposits are insured by the Federal Deposit Insurance Corp. Credit union deposits are insured by the National Credit Union Administration.

Consumer Satisfaction: Bankrate attempts to verify the accuracy and availability of its Advertisers' terms through its quality assurance process and requires Advertisers to agree to our Terms and Conditions and to adhere to our Quality Control Program. If you believe that you have received an inaccurate quote or are otherwise not satisfied with the services provided to you by the institution you choose, please click here.

Rate collection and criteria: Click here for more information on rate collection and criteria.