As the coronavirus fears continue to rack the major U.S. stock indexes with volatility, investors can seek shelter from the storm via consumer staples. The sector represents a defensive opportunity for investors to capitalize on items investors need as opposed to those they simply want.
Per a Yahoo Finance report, “while consumers will avoid making unnecessary purchases of things like luxury goods and new cars, they will continue to be in need of everyday items like groceries, which will keep the revenue streams steady for the companies that provide them. In addition, stores are being inundated by shoppers stocking up on the necessary staple foods and supplies they will need in case there are shortages later on down the road.”
Last year, the *Consumer Staples Select SPDR (XLP) was able to stave off trade war news as it hit new highs, which could have consumer staples riding alongside its wave with strength in defensive equities over cyclical equities. This could certainly serve as a strategy amid the coronavirus outbreak.
XLP seeks to provide investment results that correspond generally to the price and yield performance of publicly traded equity securities of companies in the Consumer Staples Select Sector Index, which includes securities of companies from the following industries: food and staples retailing; household products; food products; beverages; tobacco; and personal products.
As the Yahoo report noted, consumer staples are those items that appear in our cupboards and closets, from shaving cream to soda—the necessities. These items cover many everyday items and consumer goods that will continue to see demand regardless of the economic situation.
The Relative Value Trade
From a relative ETF standpoint, there could also be an angle to be had when looking at cyclical equities over defensive equities. Strength in consumer staples can translate into further strength for defensive equities as investors look to safer havens when the markets turn awry from more negative trade war news.
For investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well but from their outperformance compared to defensive sectors.
Conversely, if investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.