The Hidden Dangers of Defensive Stocks

If recent market action has you thinking about using defensive stocks as a way to protect your portfolio against downside risk, you might want to think again. Defensive stocks can provide a measure of protection in a down market … but not if the reason for the broader-market weakness is concern about Federal Reserve rate hikes. Here’s why: Investors have poured cash into higher-yielding segments of the stock market, since they’re the only option at a time of low yields for bonds. As a result, defensive investments — including dividend stocks and low-volatility market ETFs — now have a substantial amount of imbedded interest rate risk.

Don’t fall asleep at the wheel when it comes to dividend stocks, defensive sectors, or low-volatility ETFs. These groups will only provide true “defensive” characteristics if the economy slows down. This might yet prove to be the case, but investors need to be fully aware of the interest-rate bet they’re making with defensives at this stage of the cycle.

Source: InvestorPlace

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