Defensive Sector ETF: Claymore's Defensive Equity Index Fund

Conventional wisdom suggests that you hold more defensive stock sectors during turbulent times. Traditionally, this means investing in health care, utilities and consumer staples, while avoiding technology, financials and the economically sensitive consumer cyclical segment.

The losses across all stocks are so demoralizing, it's hard to make a substantive case for having had exposure to any equity position. However, if losing less is the name of the rose, then conventional wisdom on defensive equity investing has held.

Traditional Equity Safer Havens		Year-to-date		Bull Market "Faves"		Year-to-date
Health Care (XLV)		-28%		Cyclicals (XLY)		-41%
Utilities (XLU)		-32%		Technology (XLK)		-44%
Staples (XLP)		-19%		Financials (XLF)		-56%
Equal-Weighted Average		-26%				-47%

Looked at another way, a 26% loss requires a 35% to reclaim the 2007 highs. Meanwhile, a 47% loss requires an 89% bull market run to return to glory.

The bear market math here is very important; that is, for those who prefer a bit less roller-coaster in their equity endeavors, smaller losses don't require the better part of 5-7 years. In contrast, a so-called long-term investor who stayed loyal to the most volatile segments is looking at Everest.

It does make one wonder why an exchange-traded fund hadn't yet captured a defensive equity index sooner. Nevertheless, Claymore does have the Sabrient Defensive Equity Index ETF (DEF).

As of Q3 end, DEF has roughly 50% invested in the traditional defensive areas mentioned above. Admittedly, that's a heavy weighting for things like staples and utilities.

However, less we believe that DEF is the answer to "tough time" equity exposure, we have to recognize that the fund is based largely on a historical paradigm; specifically, energy has often been a safer haven in the past. That explains its 17% weighting here. (Energy year-to-date, however, is down -40%.)

The Sabrient Defensive Equity Index ETF (DEF) certainly has potential if one prefers an all-in-one solution. Yet a quick look at the fund's current weightings show that, in the current bear, it has not significantly outperformed the SPDR S&P 500 Trust (SPY) by more than a few percentage points.

Losing less is key, but losing a little bit less isn't a game-changer. If you have enough investing savvy, you might prefer selecting those defensive areas on your own, like SPDR Staples (XLP) and SPDR Utilities (XLU).

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[Mike Havrilla]

Hello Gary,

Here is another "Highly Defensive" stock index:
http://www.etfinnovators.com/2008/11/etfi-highly-defensive-performidex-lower.html

The accompanying table includes an updated version of the ETFI Highly Defensive PerformIdex of 40 companies based in the U.S., Canada, and Europe with market caps over $10B, which are the leaders by market cap in their defensive industry groups. The updates include removing retail exposure at CVS Caremark (CVS) and Tesco (TSCDY) in favor of keeping Wal-Mart (WMT) as the major beneficiary of a trade-down effect and mass merchant discounter, which integrates groceries, pharmacy, everyday clothing, consumer electronics, auto services, and household products in its stores at low prices.

Also removed from the index were Google (GOOG) and Disney (DIS), which face exposure to lower ad spending and lower theme park traffic, respectively, during the economic downturn. Comcast (CMCSA) remains as the sole at-home entertainment play as a cable TV and broadband internet access provider.

(A) Mass Merchant Discount Retailer (1)

(B) Consumer Staples (14) – Non-Food/Beverage (2), Processed & Packaged Foods (4), Tobacco (2), Alcoholic Beverages (2), Non-Alcoholic Beverages (2), Diversified Products (2)

(C) Telecom Services (4)

(D) Cable Television & Internet Access Providers (1)

(E) Utilities (3)

(F) Fast Food Restaurants (1)

(G) Commodities (2): Gold Mining (1) + Agri-Biotech (Seeds & Fertilizers) (1)

(H) Healthcare (13) – Top Seven Companies by Market Cap (7), Biotech (3) Medical Devices & Supplies (2), Generic Drugs (1)

(I) Aerospace (Non-Commercial) & Defense (1)

To replace the companies removed, Groupe Danone (GDNNY) was added to the consumer staples category while healthcare was expanded to 13 companies by adding Celgene (CELG) as a high-growth, defensive cancer biotech and Abbott Labs (ABT) + GlaxoSmithKline (GSK) as diversified healthcare companies. Also, Verizon (VZ) was added to the telecom services category, which includes four companies with dividend yields of at least 5.5% each.

Over the past year, the index has outpaced its benchmark ETFs on a total return basis with a loss of 10.9%, including Consumer Staples (XLP) (-11.3%), Healthcare (XLV) (-23.6%), Utilities (XLU) (-27.1%), Dow Jones Global Titans (DGT) (-36%), and iShares Dow Jones Select Dividend (DVY) (-28.4%). Also, the equally-weighted index has a below-market volatility beta value of 0.57, PEG ratio of 1.50, dividend yield of 3.3%, and average market cap of about $73B.