Investment funds that are moving to defensive positions, and some that are not

What are we looking for?

ETFs and DIY mutual funds that made notable changes to their defensive-sector exposure over 2022.

The screen

The year is off to a great start for equity investors, with most equity indexes posting single-digit gains on a year-to-date basis, perhaps fuelled by investors’ reinvigorated confidence that the world’s central banks have inflation under control. That said, a new economic environment of higher interest rates might prompt some investors to have a look at their sector exposures, perhaps allocating more to defensive sectors for risk-reduction purposes, or to more cyclical sectors if they’re bullish on market prospects. To help identify potential candidates, I thought to analyze funds that have made noticeable moves over the course of last year. To start with, I screened the Morningstar Direct database for Canadian-domiciled equity ETFs and DIY mutual funds for those that have a reasonable track record, denoted by their Morningstar Rating for Funds or “star” rating of three stars or better, implying that the initial universe performed at least as well as category peers.

I then looked at the sector allocations of each fund as they appeared at the end of 2022 and 2021. Specifically, I used Morningstar’s “super-sector” definitions to determine which funds have the largest changes in exposure to defensive sectors. Recall that Morningstar’s classification structure for stocks divides global companies into three “super sectors”: (1) cyclicals, which include basic materials, consumer cyclical, financial services and real estate stocks; (2) defensive, which includes consumer defensive, health care and utilities stocks; and finally (3) sensitive, which includes communications services, energy, industrials and technology companies. I used the change in exposure to the defensive sector over the 2022 calendar year as the sole metric to rank the list of three-star-or-better funds.

What we found

20 funds moving into, and away from defensive sectors

Name	Ticker	Morningstar Category	Annual Report Management Expense Ratio (MER)	Morningstar Rating for Funds	Total Ret YTD (%)	Total Ret 1 Yr (%)	Total Ret Annlzd 3 Yr (%)	Total Ret Annlzd 5 Yr (%)	Defensive Supersector (12M % Change)	Equity Econ Super Sector Defensive % (Net) 2022-12	Equity Econ Super Sector Defensive % (Net) 2021-12	Sensitive Supersector (12M % Change)	Equity Econ Super Sector Sensitive % (Net) 2022-12	Equity Econ Super Sector Sensitive % (Net) 2021-12	Cyclical Supersector (12M % Change)	Equity Econ Super Sector Cyclical % (Net) 2022-12	Equity Econ Super Sector Cyclical % (Net) 2021-12
Funds Moving to Defensive Sectors:
Fidelity US Momentum ETF	FCMO-T	US Equity	0.32		0.3	-1.7			41.7	48.4	6.7	-30.1	31.7	61.8	-11.8	19.6	31.4
Invesco S&P 500 Momentum ETF CAD	MOM-NE	US Equity	0.53	2	-1.0	4.0	1.6	3.5	38.3	49.3	10.9	-11.1	36.9	48.0	-27.8	12.9	40.7
iShares MSCI USA Momentum Ftr ETF	XMTM-T	US Equity	0.32	3	-1.1	-0.9	4.9		29.9	46.2	16.3	-13.2	36.8	50.0	-16.5	16.8	33.3
Purpose Global Innovators ETF	PINV-T	North American Equity	1.23	1	4.0	-24.7	-3.8		28.8	43.3	14.5	-28.4	37.1	65.5	-5.5	4.6	10.1
CI Munro Global Growth Equity ETF	CMGG-T	Global Equity	1.06		3.5	-4.7			22.6	38.4	15.8	-18.4	34.7	53.1	-6.7	21.8	28.5
CI Global Climate Leaders ETF C$	CLML-T	Global Equity	0.93		1.4	-3.6			21.5	39.6	18.0	-8.3	43.8	52.1	-16.4	9.5	25.9
SmartBe U.S. Quantitative Momentum ETF	SBQM-NE	US Equity	0.99		1.3	12.2			18.6	30.1	11.6	18.5	58.3	39.8	-36.7	11.3	48.0
Fidelity International Low Vol ETF	FCIL-T	International Equity	0.48	3	2.4	-1.3	-0.7		16.7	50.4	33.7	-0.4	23.8	24.2	-16.7	24.8	41.4
CI WisdomTree Intl Qual DivGrETF	IQD-T	International Equity	0.58	5	6.6	0.7	5.6	6.2	16.6	42.1	25.5	-4.2	30.7	34.9	-11.9	27.0	39.0
SmartBe Canadian Quantitative Mmntm ETF	SBCM-NE	Canadian Equity	0.08		2.4	1.7			15.1	20.3	5.2	9.4	48.4	39.0	-24.4	30.9	55.2
Funds Moving away from Defensive Sectors:
Leith Wheeler Intl Equity Plus Series B		International Equity	1.59	2	6.3	-1.9	1.0	-0.8	-12.0	15.1	27.1	5.2	25.9	20.8	12.7	30.1	17.4
Invesco S&P 500 Hi Div Low Vol ETF CAD	UHD-NE	US Equity	0.39	2	1.6	10.2	5.4	6.1	-12.1	40.3	52.4	-3.6	22.3	25.8	16.3	36.9	20.6
Beutel Goodman North American Focus Eq D		Canadian Focused Equity	1.49	4	4.4	4.8	8.7	7.2	-12.3	18.4	30.7	11.5	34.9	23.4	0.1	44.2	44.1
Fidelity US Value ETF	FCUV-T	US Equity	0.36		6.0	12.2			-12.9	18.3	31.3	7.4	46.4	39.0	4.6	34.2	29.6
Fidelity US Value Currency Neutral ETF	FCVH-T	US Equity	0.39		7.5	5.1			-13.0	18.3	31.3	7.3	46.2	39.0	5.2	34.8	29.6
Horizons NASDAQ-100 Cov Cll ETF	QQCC-T	International Equity	0.85	1	6.7	-4.1	0.6	-1.1	-16.2	15.6	31.8	36.8	68.7	32.0	-19.2	15.2	34.5
TD Q Canadian Dividend ETF	TQCD-T	Canadian Dividend & Income Equity	0.39	1	7.4	9.3	5.5		-16.7	11.5	28.2	6.6	40.9	34.4	10.3	47.1	36.8
Invesco S&P GlbexCndHiDivLowVol ETF CAD	GHD-NE	Global Equity	0.67	2	4.3	6.3	1.5	3.2	-18.8	33.3	52.1	5.8	22.1	16.3	11.5	39.0	27.5
First Trust Morningstar Div Lrs ETF CADH	FDL-T	US Equity	0.66		3.2	8.3	11.3	7.8	-19.4	31.1	50.5	9.4	45.0	35.7	10.7	22.1	11.4
Guardian Fundamental All Country Eq ETF	GGAC-T	Global Equity	1.05		7.7	2.4			-25.2	2.1	27.4	-20.6	12.0	32.6	-23.2	13.9	37.1

Source: Morningstar Direct | Data as of January 27, 2023

The accompanying table includes 10 funds that have shifted their exposure toward defensive sectors the most, and the 10 funds that have shifted the furthest away from defensive sectors. The table also displays fees, trailing performance, ratings and inception dates. It is worthwhile noting that the three funds that have moved most into defensive sectors (XMTM-T, FCIL-T and IQD-T) are “smart beta” products, which are rules-based in nature and do not follow the discretion of a portfolio manager. Interestingly, the three funds are exposed to quite different factors. Also noted is the fact that several smart beta products that look for exposure to dividends (such as FCUD-T, XHU-T and VIDY-T), have shifted away from defensive sectors, while RBC’s actively managed mutual funds have increased their exposure to defensive sectors.

This article does not constitute financial advice. Investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.