Since the U.S. stock market peaked on Feb. 19, the S&P 500, which is often used as a benchmark, has fallen approximately 30% as of market opening on March 24. The SPDR S&P 500 (SPY, Financial) ETF, an exchange-traded fund that allows investors to easily buy into the S&P 500 companies, was also down 30% over the same time frame.
While ETFs do not have the same level of selectivity as investments in individual securities, they do offer a convenient means of diversification. Thus, ETFs in general are more defensive than common stock investments, and some investors hold shares in them in order to mitigate some of the risks of common stock portfolios.
This can be demonstrated by the fact that certain companies in the S&P 500, such as Delta Air Lines (DAL, Financial), are down more than 50% since the market downturn began, while others, such as Campbell Soup Co. (CPB, Financial), have lost less than 15%. From the general trend of the stocks of these two companies prior to 2020, Delta was the better investment, but we have no way of knowing ahead of time what will trigger Mr. Market’s mood swings.
In this economic crisis, the following three ETFs have held up better than the S&P 500, indicating that they provide more downside protection in comparison.
Consumer staples
The SPDR Select Sector Fund - Consumer Staples (XLP, Financial) ETF is down 21% since Feb. 19. On March 23, the ETF traded around $50.75 per share for a market cap of $12.65 billion, a price-earnings ratio of 21.96 and a price-book ratio of 4.57.
The ETF tracks the performance of 34 publicly traded consumer staple companies. Consumer staples, which include packaged foods, grocery items and basic medical supplies, often fare well in a recession as people will need to purchase these items regardless of economic conditions. In fact, during turbulent times, it is not uncommon for consumers to “panic buy” these items as they stock up in fear of a complete economic collapse.
The top holdings of this ETF are Procter & Gamble (PG, Financial), Walmart (WMT, Financial), PepsiCo. (PEP, Financial), Coca-Cola Co. (KO, Financial) and Costco Wholesale (COST, Financial).
Gold
The VanEck Vectors Gold Miners (GDX, Financial) ETF is down 17% since Feb. 19. On March 23, the ETF traded around $24.93 per share for a market cap of $10.75 billion, a price-earnings ratio of 35.24 and a price-book ratio of 1.81.
The ETF aims to track the performance of companies in the gold mining industry by replicating the NYSE Arca Gold Miners Index (GDMNTR). More gold is typically sold when economies are strong, but when markets are weak, the price per ounce of gold often rises as the precious metal is considered a safe-haven asset. This results in gold mining ETFs having lower volatility.
The top holdings of this ETF are Newmont Corp. (NEM, Financial), Barrick Gold Corp. (GOLD, Financial), Franco-Nevada Corp. (FNV), Wheaton Precious Metals Corp. (WPM) and Kirkland Lake Gold (KL).
Foreign markets
The KraneShares Trust CSI China Internet (KWEB) ETF is down 15% since Feb. 19. On March 23, shares of the ETF traded around $43.96 for a market cap of $2.24 billion, a price-earnings ratio of 29.81 and a price-book ratio of 3.74.
The ETF aims to track the performance of China-based internet companies, including companies similar to the U.S.’s Alphabet (GOOGL), Facebook (FB), eBay (EBAY) and Amazon (AMZN). Exposure to foreign companies is a good way to diversify an investing portfolio, and China’s growing middle class is contributing to the profitability of the country’s internet companies.
In addition, China’s stock market was already undervalued before Covid-19 began to weigh on it, according to the ratio of the country’s total market cap to gross domestic product, which stood at 38% as of the beginning of 2020. The ratio of total market cap to GDP measures the valuation of a stock market; if the ratio is above 100%, it indicates overvaluation, whereas if it is below 100%, it indicates undervaluation. This has led to fewer stock market losses than the U.S., which has seen its total market cap exceed GDP since 2013.
The top holdings of this ETF are Alibaba Group Holding (BABA), Tencent Holdings (HKSE:00700), Meituan Dianping (HKSE:03690), Baidu Inc. (BIDU) and JD.com Inc. (JD).
Disclosure: Author owns no shares in any of the stocks mentioned. The mention of stocks in this article does not at any point constitute an investment recommendation. Investors should always conduct their own careful research or consult registered investment advisors before taking action in the stock market.
Read more here:
- How Top Food Companies Are Responding to Changing Consumer Habits
- 3 'Magic Formula' Stocks With High Financial Strength
- Finding Companies That Can Survive Hard Times
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