The capital markets typically view defensive equities as a strategy when investors play not to lose as opposed to simply playing to win. The S&P 500 reached a record high in Monday’s trading session, but it’s not growth-oriented, cyclical equities leading the index, but defensive equities.
The shift to defense underscores the recent trend of investors looking towards more value-oriented plays in the capital markets. So far, it’s a move that’s proving to be a winner.
“The S&P 500 is back at all time highs but with even greater defensive leadership it may warrant investor caution with respect to a growth reacceleration,” Mike Wilson, Morgan Stanley’s U.S. chief equity strategist, said in a note to clients on Monday.
Per a CNBC report, “Health care stood out as the best-performing sector on Tuesday, lifted by Pfizer, Merck and HCA’s earnings beats. Consumer staples and real-estate stocks also outperformed. However, growth and more cyclical names — tech, communication services and consumer discretionary — have started to show signs of weakness.”
Names that have been leading the extended bull run like Google and Apple as well as other FAANG names have been experiencing declines.
“People had aggressively pushed cyclicals higher over the past two weeks,” said Tom Essaye, founder of the Sevens Report. “But in order for that to work out beyond the short term, we need to see economic data get better, and that’s not really happening.”
Making a Play on Defensives
If investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors. RWDC seeks investment results that track the MSCI USA Defensive Sectors – USA Cyclical Sectors 150/50 Return Spread Index.
The Index itself measures the performance of a portfolio that has 150% long exposure to the MSCI USA Defensive Sectors Index (the “Long Component”) and 50% short exposure to the MSCI USA Cyclical Sectors Index (the “Short Component”). If investors feel that defensive sectors will get the nod moving forward, they best give RWDC a closer look.
Conversely, for investors looking for continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.
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