Some encouraging words for all the retirees who hold defensive stocks in sectors such as utilities, pipelines and consumer staples: You’re doing the right thing.
A report from the fund managers at Capital Group says that low-beta stocks – those that are less volatile than the benchmark stock index – are a good fit for investors with a shorter time horizon, including those nearing retirement.
“These [stocks] have a more conservative profile that reduces the risk of losses while at the same time keeping a healthy allocation to equities, which offer superior long-term returns compared to bonds,” Sunder Ramkumar, senior vice-president of client analytics at Capital Group in Los Angeles, writes in the report.
Mr. Kumar says that high-beta stocks are riskier and more volatile, but deliver higher returns over the long term. But low-beta stocks can be a good compromise for those who are near or in retirement. Mr. Kumar’s research shows they have delivered returns that are almost the same average return as the broad market, while losing less in down markets.”Adding bonds to a portfolio could have lowered downside, but with far lower average returns,” he writes.
The implication here is that a retiree would do better with a portfolio of defensive stocks than with stocks or an ETF reflecting the S&P/TSX composite index or S&P 500. Fortunately, the ETF world has a tonne of options for focusing on low beta stocks. Check out the Canadian and U.S. equity installments of The Globe and Mail ETF Buyer’s Guide for mention of several of these funds.
One is the BMO Low Volatility Canadian Equity ETF (ZLB), which delivered an annualized return of 11.5 per cent over the five years to the end of June. The S&P/TSX composite index made just 4.7 per cent over that period.
Theoretically, low-volatility stocks should disappoint at times when the stock market is surging. But ZLB has actually done just a bit better than the index’s 16.2 per cent gain over the first half of 2019. Don’t count on low-volatility investments to keep up this pattern of providing less downside risk with equal or better upside. Low-volatility stocks can be a good option for retirees, but they will at some point lag the more growth-oriented part of the stock market.
And, yes, they can lose money. Defensive stocks are sensitive to rising interest rates – not that this is an issue right now.