Following a wild week in which the VIX (Volatility Index) had two 10 percent spikes, and high-priced tech stocks whipsawed, the move to safety has begun. With the markets getting choppy, despite the prospect of further upside, investors are slowly but surely moving away from high risk, high return sectors such as Technology to more sedate but safer sectors such as Consumer Staples. In this edition, we look at defensive sectors that offer modest upside and continued investment in equities but gives the protection of a healthy dividend and minimal downside in the event of a correction.

During bouts of volatility, Consumer Staples ETF, which holds stocks such as Pepsico, Proctor and Gamble, Walmart and Colgate Palmolive among others, is a haven for investors who want a higher dividend payout than the S&P 500. Currently, this ETF yields 2.85% vs the 1.79% dividend yield on the S&P 500. But the Consumer Staples sector has declined by 3.9% year to date versus the S&P 500 that has gained by 6.2%.

Another ETF to go for safety is the Utilities ETF that holds stocks such as Duke Energy, Southern Co., Edison, American Electric Power among others. This ETF has a higher dividend yield of 3.25% and has also gained 2.87% year to date, not even close to matching the S&P 500 return but that is the price of safety.

So, when is the right time to shift to safety and take shelter?

Future Wealth’s View

Ah! The million dollar question. Ignore the noise is what the doctor ordered. Until, it is wrong advice. When there is one or two negative events of note, they can be dismissed noise. When there is a series of bad events, one after the other, recurring every week, then investor’s risk appetite slowly diminishes. Frequent market turbulence also reflects the fragility of the financial system and as more central banks join the Fed in withdrawing stimulus, global economic slowdown is inevitable. This will likely be preceded by lack of enthusiasm by investors which implies that markets move sideways within a range  and makes a compelling case for safety.

At Future Wealth, we have always been big believers of dividend yield. We have placed a certain portion of client assets as dividend plays while investing a greater portion on high growth, high return products. We see no reason for a major shuffle at this time but will slowly be moving out of riskier positions as markets get more frothy. While investing in these defensive names is neither sexy nor exciting like investing in Tesla or Amazon, we think it is better to preserve capital and trade off a few basis points on the return, rather than be all-in and resort to Ambien to retain sanity at a later date.