In a recent post we saw that the defensive sectors were twice as effective as a balanced portfolio moving through and beyond the great financial crisis. The financial crisis was the bank -failure-inspired recession and market correction of 2008-2009 and beyond. It was the worst correction since the dot com crash of the early 2000’s. Defensive sectors can play the role of bonds (and work in concert with bonds and cash) to provide greater financial stability. With defensive sector ETFs you might be able to build a superior Canadian retirement portfolio.
First off, here’s the original post on the defensive sectors for retirement.
The key defensive sectors are healthcare, consumer staples and utilities.
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And a key chart from that post. The defensive sectors were twice as good as the traditional balanced portfolio. The chart represents a retirement funding scenario.
You can check out the original post for ideas for U.S. dollar defensive sector ETFs.
And here’s the defensive sectors recent history in other recessions and major corrections.
The following is for Canadian dollar accounts. Keep in mind, this is not advice. Consider this post as ‘ideas for consideration’ and part of the retirement portfolio educational process.
80% Equities / 20% Bonds and Cash
Growth sector ETFs
- 15% VDY Canadian High Dividend
- 15% VGG U.S. Dividend Growth
Canadian defensive sector ETFs
- 15% ZHU U.S Healthcare
- 10% STPL Global Consumer Staples
- 5.0% XST Canadian Consumer Staples
- 10% ZUT Canadian Utilities
Inflation fighters
- 5% PRA Diversified Inflation Assets
- 5% XEG Oil and Gas Stocks
Bonds and Cash
- 10% CBIL Short Term Bonds
- 10% Savings and GICs 3%-5.5%
Here’s a chart comparing the defensive sector ETF portfolio with iShare global balanced portfolio XBAL-T. I am not able to input the higher rates that one would have been able to lock in, in 2022 and 2023. I’ve used a cash ETF as a store of value. Meaning the returns would have been even better had you locked in some higher rates with GICS, as suggested.
We see that the defensive portfolio is better than a (very good) classic balanced portfolio, in every way. We have greater returns with less risk.
We’ll go further back, but limited by the start date of STPL.
To go back 10 years, I removed STPL and used XST (Canadian) for the staples sector exposure. The out performance is over 2% annual.
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A Canadian investor may use the US. sector ETFs in RRSP/RRIF and taxable accounts to create more optimal tax efficiency. They may avoid the withholding taxes on U.S. dividends. You’ll some info and links on the ETF model portfolio page.
Find your own comfort level
The above portfolio for consideration has 60% in defensive assets, the defensive stocks plus the bonds and cash. You may decide to go more defensive with greater cash and bonds. Given the times, I would not argue with a retiree that would want to completely remove sequence of returns risk in the first several years years of retirement. That is, you would have those years covered by cash (GICs) and bonds.
The retiree might then introduce more equities over time to introduce greater growth, if more growth is required to meet retirement funding needs. We call that a reverse equity glide path. It’s dollar cost averaging for retirees.
You would essentially retire “risk free” for that time period. Should inflation continue to bite, you have the inflation fighting basket that should provide a buffer. Your defensive stocks may once again perform better than bonds (as a stock market shock absorber).
You may decide to pensionize more of your income with annuities and the Purpose Longevity Pension Fund.
The 7-ETF portfolio for retirees
Keep in mind there is nothing wrong with the 7-ETF portfolio for retirees. As suggested in that post, I would shade in some dedicated inflation fighters.
I prefer to use more defensive sector equity allocation. That is a personal choice based on my own research. And I certainly like the all-weather portfolio approach for retirement.
We did not feeling the crunch of inflation through 2021 and 2022 and to present.
The retirement plan
Just as important as the investment assets and allocation is the greater financial plan. Self-directed investors can access an advice-only retirement planner. You’ll receive conflict-free advice that is not attached to any financial assets.
Be sure to run a retirement cash flow calculator. You’ll learn how to do that (and more) at Retirement Club for Canadians. We all need an optimized, tax-efficient cash flow plan.
Use the Contact Dale form if you’d like to sign-up, or for more information on Retirement Club.
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