Is it time to play defense?
Investors might be asking themselves that very question as stocks continue their latest roller-coaster ride, with the U.S. stock indexes rallying Thursday after U.S. and Chinese trade negotiators agreed to meet for further talks.
As traditionally safe-haven investments continue to climb — with real estate, utilities and consumer staples up double digits in the last 12 months, the best performers and only double-digit gainers over that time frame — investors might be looking for less crowded plays to protect their holdings.
Enter Invesco's Defensive Equity ETF, ticker DEF, up 21% for 2019 versus the S&P's 17% gain. An equal-weighted fund whose top holdings include S&P 500 stocks like Ball Corp., Amgen and Hershey, DEF gives investors a "modern" way to play for safety, says Dave Nadig, managing director of ETF.com.
"I think it's a great play for a lot of investors who want to stay invested in the equity market," Nadig said Wednesday on CNBC's "ETF Edge."
"It looks for stocks that have really high betas; it kicks those out of the S&P 500," he said, referring to a widely used volatility metric. "It looks for stocks that have historically done poorly in downturns; it kicks those out of the S&P 500. Then, it looks at what's left and it only picks those with really long-term, sustainable revenue models. You end up with 100 equal-weighted stocks with pretty broad sector exposure."
Steve Grasso, managing director of institutional trading at Stuart Frankel, said in the same interview that DEF offers an "excellent" form of portfolio protection for those "preparing for their own retirement or their children's investment."
"You have things that are clearly defined as safety, clearly defined as risk, and I think you sort of get a hybrid model here where you only go with things that have outperformed," Grasso said.
And in this "strange" market environment, "a lot of the things that should not continue to outperform continue to outperform," the longtime trader noted. "So, ... go with what has outperformed. Stay in those trades."
In the case of DEF, the nearly 13-year-old fund also gives investors a chance to take their emotions out of the equation, Nadig said.
"It avoids the trap of saying, 'I'm not going to own any technology because that's growth and we're not going to be in a growth market,' or 'I'm going to avoid all health-care stocks because that's a political football,'" he said. "I think it lets you stay invested, and I think that's the most important thing as we head into what's going to be a crazy 18 months."