With the price of oil falling and
stock market volatility climbing, extra emphasis on portfolio defense might be in order, at least for the near term.
“I don't think this will be the way it is all year, but if you're expecting more volatility or a sell-off at some point, getting defensive will work as a portfolio hedge,” said Quincy Krosby, market strategist at Prudential Financial Inc.
Far from recommending a major portfolio adjustment that would equate to retreat from equities, Ms. Krosby suggests a tried-and-true strategy of employing a barbell that is weighted on one end with defensive positions in utility and consumer discretionary stocks and real estate investments to offset riskier exposure on the other end.
“One end is kind of boring, but the other end of the barbell is taking a little bit more risk,” she said. “On the risky side, if you believe the wage tick-down was a one-off and you believe in the unemployment trend and the stronger U.S. dollar, you might start adding some small caps.”
As some market watchers are pointing out, financial markets are becoming increasingly unpredictable. The price of oil has fallen below $47 a barrel, the stock market volatility index is up more than 200% from its Dec. 26 low,
and the dollar continues to surge.
“The big problem is that there is no way to really know where oil prices will end up,” said Joseph Witthohn, portfolio manager at Emerald Asset Management.
He cited a raft of
mixed reports claiming every possible direction for oil, which is adding to investor confusion — with one result being the spike in stock market volatility.
“I am neither defensive nor aggressive because if those who do this every single day can't agree on where prices are heading, then I have no shot,” Mr. Witthohn said. “Me? I'm filling up my gas tank and enjoying it while it is still here.”
Being neither defensive nor aggressive might sum up a lot of investors and financial advisers right now, which brings us back to the barbell.
“At least for the first quarter, I would look at things more on the defensive side with a higher quality portfolio,” Ms. Krosby said. “We want to get through the earnings season and we want to hear some guidance” from corporate management on future earnings trends.
If defense is the strategy, Todd Rosenbluth, director of mutual fund and ETF research at S&P Capital IQ, recommends sticking with the workhorse sectors that tend to hold tough in shaky times.
“We tend to think of health care, utilities, consumer staples and REITs because they are known for stable earnings, they pay dividends and they tend to have largely U.S. operations that will protect them from the challenges facing Europe and Asia,” he said. “They will also benefit from some of the tailwinds in the U.S. economy.”
For exposure to the utilities sector, which gained 28.7% last year, Mr. Rosenbluth recommends the Utilities Select Sector SPDR ETF (XLU). An index offering broad health care sector exposure is Health Care Select Sector SPDR (XLV), which gained 25.1% last year.
While the health care ETF is heavily weighted in pharmaceutical stocks, Mr. Rosenbluth warned that it also includes enough biotechnology exposure to introduce some volatility.
For exposure to goods and services that consumers will typically purchase regardless of economic conditions, he recommends Consumer Staples Select Sector SPDR (XLP), which gained 15.7% last year.
“This ETF is full of large companies, and in times of volatility, size matters,” Mr. Rosenbluth said.
For real estate exposure, he recommends Vanguard REIT (VNQ), which gained 30.4% last year.
Another way to gain some defensive exposure during increased market choppiness is the PowerShares S&P 500 Low Volatility ETF (SPLV), which gained 17.3% last year, and is made up of the 100 least risky stocks in the S&P.
