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The markets are taking a hit, and recession talk is growing. Nasdaq is in bear market territory, and the S&P 500 is a stone’s throw away.

There’s a saying on Wall Street that a rising tide raises all boats. The corollary is that an ebb tide does the opposite.

No matter how defensive your stock portfolio, you’re likely to see your net worth decline during a market correction. There are occasionally one or two sectors that resist the trend – this time it’s energy. But generally, when the broad market drops, it sucks down everything with it. Think of it as a financial black hole.

That said, historically some sectors are hit harder than others when the bear comes calling. During the crash of 2007-09, the MSCI World Sector Index dropped 41.2 per cent. But financials and real estate did much worse, losing 58.5 per cent and 54.5 per cent, respectively. Meanwhile, consumer staples and health care were down 22.4 per cent and 25 per cent, respectively. Big losses, yes. But less than half that of financials and real estate.

Fast forward to the pandemic bear market of 2020. The MSCI World Index fell 20.1 per cent but energy (down 43 per cent) and financials (30.2 per cent) fared much worse. The least affected? Again, health care (down 10.9 per cent) and consumer staples (off 12.1 per cent).

Over the years, I’ve often recommended utilities and telecoms as key elements in creating a low-risk portfolio. I still like those sectors. But a sound defensive portfolio needs more diversity. The bear market performance numbers suggest that both health care and consumer staples should be added to the list.

The easiest way to achieve this is with exchange-traded funds. They’re inexpensive and offer broad diversification, within the limits of their mandates. We already have one health care ETF on my Income Investor recommended list. Here is an update.

Harvest Healthcare Leaders Income ETF (HHL.U-T)

Current price: $8.94 (figures in U.S. dollars)

Annual payout: 69.96 US cents

Yield: 7.8 per cent

Risk: Moderate


Comments: This ETF invests in an equally balanced portfolio of 20 leading health service companies, including insurers, equipment manufacturers, biotechnology and pharmaceutical companies. It’s an international fund, although most of the holdings are U.S. companies. Pharmaceuticals account for 40.3 per cent of the portfolio.

Some of the top names include Merck & Co., Thermo Fisher Scientific Inc., AstraZeneca PLC, Eli Lilly and Co., and Agilent Technologies Inc. All are large-cap companies (minimum capitalization is US$5-billion). The managers write covered call options on a portion of the holdings to generate additional cash flow.

There are three investment options: HHL.U is denominated in U.S. dollars; HHL is hedged back into Canadian dollars and priced in loonies; HHL.B is also priced in Canadian dollars but is unhedged. We are tracking the U.S. dollar version.

The fund has traded in a narrow range between US$8.31 and US$9.35 over the past year. It’s now at about the midpoint of that range, at US$8.94.

One of the attractions of this ETF is the consistency of its distributions. They have been maintained at 5.83 US cents a month since the original fund (HHL) was launched in November, 2014. Assuming that rate continues, the forward yield is 7.8 per cent.

The performance record is very encouraging for defensive portfolios. The U units have never lost money over a calendar year since they were launched in 2017. The average annual compound rate of return since inception (to April 30) is 10.7 per cent. The management expense ratio is 0.99 per cent.

Moving over to the consumer staples sector, I looked at both Canadian and U.S. entries using two main criteria: safety and cash flow. Here’s my choice:

BMO Global Consumer Staples Hedged to CAD Index ETF (STPL-T)

Current price: $24.17

Annual payout: 56 cents

Yield: 2.3 per cent

Risk: Moderate


Comments: The fund was launched in April, 2017, and has an average annual compound rate of return since inception of 6.3 per cent (to April 30). It took a hit in the market sell-off in May, losing about 5.5 per cent of its value in a three-week period, but that was a better result than the broad indexes.

The portfolio consists of 156 mid- to large-cap global companies. Top holdings include Procter & Gamble Co., Nestlé, Coca-Cola Co., PepsiCo Inc., and Philip Morris International Inc. About two-thirds of the stocks are U.S. companies, with 12 per cent in Britain and the rest scattered around. Canadian representation is 1.1 per cent.

Distributions are paid quarterly and are currently set at 14 cents a unit. If that rate is maintained (no guarantee), it would work out to 56 cents a year for a yield of 2.3 per cent based on the current price. The management expense ratio is 0.4 per cent.

To sum up, the yield is modest, but this ETF will add a degree of stability to the equity portion of an income portfolio.

Gordon Pape is editor and publisher of the Internet Wealth Builder and Income Investor newsletters.

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