Defensive Sectors for Retirement

By Dale Roberts, cutthecrapinvesting

Special to Financial Independence Hub

Defence wins championships say many sports commentators. Defense can be a big winner for retirees as well. In fact, from the massive correction known as the financial crisis (2008-2009 and beyond) using defensive sectors was twice as effective as using bonds. Then, factor in the generous and growing dividends that Canadian retirees embrace, and we might have an unbeatable retirement funding model. Let’s take a quick look at defensive sectors for retirement.

The first question you will likely ask is – “what are the defensive sectors?”

Consumer staples / Healthcare / Utilities

For the utilities sector, we will include the modern utilities known as telco (we can’t live without being hooked up in the modern world). Pipelines are also in the mix.

The 3 defensive sectors are products and services that we can’t live without. And we often do not reduce spending in these categories, even during times of recessions and bear markets.

The sectors are more durable and will typically hold up quite well during the bear markets. Of course, bear markets can pull the rug out of your retirement plans if you are not properly prepared, and are exposed to too much stock market risk. In retirement we are looking to grow and protect.

Defensive sectors for retirees vs the market

Here’s a chart that looks at the defensive sectors in the U.S. vs the S&P 500. It is a retirement funding scenario, where the portfolios are funding retirement at a 4.8% annual spend rate. That is, a million dollar portfolio will deliver $48,000 in year one. Spending will then increase at the rate of inflation.

Here’s building the big dividend retirement portfolio.

Keep in mind that the ETFs used in the example are U.S. dollar funds and belong in U.S. dollar accounts. You may choose to build a stock portfolio from these sectors. That is what I do with great success.

What is shocking is that through just one investment cycle (bear market through bull market), the defensive sectors for retirees finished the period with twice as much as the traditional balanced portfolio approach. Team defense was also better than a mix of defensive sectors and bonds.

Disclaimer: past performance does not guarantee future returns.

Canadian defensive sector ETFs

These ETFs are Canadian dollar ETFs, suitable for Canadian dollar accounts. Some of the ETFs will offer international exposure.

Canadian healthcare ETFs

  • Harvest – HHL
  • BMO – ZHU

Canadian consumer staples ETFs

  • BMO – STPL
  • iShares – XST

Canadian utilities  ETFs

  • iShares – XUT
  • BMO – ZUT
  • BMO Covered Call Utilities – ZWU
  • Horizons – UTIL
  • Hamilton – HUTS. This ETF uses modest leverage.

The all-weather models for retirees

Readers will know that I embrace the all-weather portfolio models for retirement. In the above scenario the time period is almost exclusively during a period of disinflation. Stock markets and bonds love disinflation. In the defensive portfolio there would be no meaningful protection from robust inflation.

The all-weather portfolio – ready for most anything.

Given that I would suggest that you consider adding (bolting on) inflation protection. In Canada, that can be as easy as adding the Purpose Real Asset ETF. That holds a very nice mix of dedicated inflation fighters, from energy stocks, REITs, gold and commodities.

I also continue to like the idea of Canadian oil and gas stocks. The energy sector has the highest success rate for battling inflation. Your pipeline stocks will help in that regard as well.

Defense + Inflation Protection + YIELD

For the retiree I think the above hat trick is a winning combination. That’s how I go at it.

You might have a look at the Canadian Wide Moat Portfolio, but pay more attention to the wider-moat portfolio that includes grocers and railways. Within the 5 wide moat (oligopoly sectors) we can shape the portfolio for yield and defensive nature.

Here’s a post that covers our U.S. and Canadian stock holdings. I also recently wrote on the 8 U.S. stocks that are in my RRSP retirement portfolio. From 2020 when the world changed, the 8 U.S. stocks delivered 13.3% annual vs 7.5% for the S&P 500. Crazy.

I continue to be a fan of holding some bonds and cash. That is still a key in retirement. While we can use the defensive stocks as bond proxies (replacements) they cannot entirely replace bonds and cash IMHO. For argument sake it may allow you to reduce your bond and cash exposure from 40% to 20%.

Of course, you will understand your own situation and need to protect your portfolio assets. Keep in mind, this is not advice, but ideas for consideration. Please ensure that you understand the risks, and more importantly what you are doing and why.  All said, retirement funding can also be very simple, and stress free.

Get a retirement plan

Self-directed investors can use an advice-only planner for conflict-free advice. You only pay for what you need.

The self-directed investor might consider the service provided by Mark Seed from My Own Advisor. He runs Cashflows & Portfolios. where they will provide options for a more optimal retirement funding strategy. That service is provided for a very reasonable fee. If you do head to Cashflow & Portfolios, be sure to tell them Cut The Crap Investing sent ya.

Many Cut The Crap Investing readers have used Cashflows & Portfolios to learn how to better shape their retirement funding approach.

Thanks for reading. We’ll see you in the comment section. Be sure to follow this blog for more on a successful retirement plan. Please share this post with friends and family.

Dale Roberts is the owner operator of the Cut The Crap Investing blog,  and a columnist for MoneySense. This blog originally appeared on Cut the Crap Investing on Feb. 18, 2023 and is republished on the Hub with permission. 

Leave a Reply