Investing in Defensive Industries, Explained

Defensive Industries Can Provide Outsized Returns in Recessions and Depressions

Defensive industries are those that are resilient to economic turbulence-- and therefore, investing in stocks in defensive industries can be an extremely effective way to balance your portfolio and prevent losses during market crashes, recessions, and even depressions. 

Some top industries for defensive stocks include the consumer staples sector (also known as consumer defense), the healthcare and pharmaceutical sector, and the energy sector. These sectors sometimes underperform benchmarks like the S&P 500 during economic expansion and stock market highs but typically significantly outperform the S&P 500 during market crashes, such as those experienced in 2000, 2008, and even 2022. 

Getting exposure to defensive sectors in your portfolio can be done in various ways, including investing in individual stocks, ETFs, and mutual funds. 

In this article, we’ll review each of the three most popular defensive industries and examine their performance during economic stress, focusing on the period of 2000-2010 via backtesting. To do this, we’ll compre baskets of stocks in each of these industries to the S&P 500.*

*In these baskets, all stocks were set to equal weights and rebalanced at the end of each calendar year. 

Energy Stock Basket Performance vs. S&P 500 (2000-2010)

• Performance (2000-2010): 16.5% (vs. 0.35% for S&P 500) 

• 10-Year Portfolio Growth of $10,000: $51,191

• Stocks: 

• Exxon Mobil Corp

• Chevron Corp

• Shell 

• ConocoPhillips

• BP 

• Southern Company

• Duke Energy Corporation

• EOG Resources Inc

• Occidental Petroleum Corporation

• Williams Companies Inc

Pharmaceutical Stock Basket Performance vs. S&P 500 (2000-2010)

• Performance (2000-2010): 9.25% (vs. 0.35% for S&P 500) 

• 10-Year Portfolio Growth of $10,000: $26,541

• Stocks: 

• Eli Lilly and Company

• Johnson & Johnson

• CVS Health Corp

• Merck

• Pfizer

• Bristol-Myers Squibb

• Gilead Sciences

• GlaxoSmithKline

• Novo Nordisk

• AstraZeneca

• Regeneron Pharmaceuticals

• Amgen

• Laboratory Corporation of America Holdings

• Baxter International

• Viatris

Consumer Defensive/Consumer Staples Stock Basket Performance vs. S&P 500 (2000-2010)

• Performance (2000-2010): 8.46% (vs. 0.35% for S&P 500) 

• 10-Year Portfolio Growth of $10,000: $24,426

• Stocks: 

• Walmart 

• Procter & Gamble 

• Costco

• Coca-Cola

• PepsiCo

• Altria Group

• Colgate-Palmolive

• Target

• Kimberly-Clark Corporation

• Constellation Brands

• Hershey

• Kroger

• General Mills

• Sysco

• Archer-Daniels-Midland

• Kellanova

• Tyson Foods

• Church & Dwight Company

• Brown-Forman Corporation

• McCormick & Company

Getting Defensive Stock Exposure Through Sector ETFs

While investing in individual, high-quality stocks is a fantastic way to get exposure to defensive industries, it’s not the only way. DIY investors who don’t have the time or experience to invest in individual stocks can utilize sector ETFs to get exposure to a wide basket of stocks in specific defensive industries. 

Which Are The “Least Defensive” Stock Sectors? 

It can be difficult to say which sectors are the “least defensive” at any one point of time, especially due to the fact that stock market crashes, recessions, and depressions can be caused by a variety of different reasons. However, a few of the sectors that have performed the worst during recessions include: 

• Luxury Products: When times are tough and people have less money to spend, luxury products are one of the first things they stop buying, hence, luxury stocks (think LMVH, Ferrari, and Lamborghini) typically don’t fare well during periods of economic turbulence. 

• Technology: While technology stocks have been incredible performers over the last 15 years or so, they tend to become extremely overvalued when the market peaks, hence, they often crash during recessions. 

• Real Estate: Real estate stocks, such as REITs, face both the risk of general stock market turbulence and other risks, like increased interest rates, as most real estate (including properties owned by REITs) are purchased with loans. Hence, when the cost of borrowing money goes up, real estate stocks often plummet. This was particularly apparent during the 2008 financial crisis, which was partially caused by a massive (and highly unsustainable) increase in real estate lending. 

• Financials: During stock market crashes and lean financial times, the borrowing power of individuals often goes down, meaning that banks and other financial companies often suffer the consequences. 

In Conclusion: Defensive Industries Can Provide Security During Tough Economic Times

Investing in defensive industries might not be the most exciting thing, but it can pay off, especially during times when the rest of the market is not performing well. In general, defensive industries provide products or services that are needed during all economic times, good and bad, and when capital (i.e. money) flows out of higher-risk, higher-growth stocks (think fast-growing tech companies or luxury brands) some of it generally flows back into stocks in industries that produce highly-needed products, such as energy, pharmaceuticals, or basic consumer goods. While solely investing in defensive stocks can reduce your investment returns during bull markets, they can reduce your downside in bear markets, which is ideal for those who want a lower level of portfolio volatility and fewer drawdowns-- which includes many retirees. 

Therefore, the amount of an investor’s portfolio placed in defensive stocks should align closely with their risk tolerance and financial goals, especially retirement timelines. However, investors of any age and risk tolerance should consider holding some defensive stocks (whether through individual stock ownership or sector ETFs) in their portfolio, so that will have a good probability of generating reasonable returns through both good times and bad.