How Can Sectors Hedge Current Market Risks?
While the S&P 500 Index is down -8.5% so far this year, defensive sectors — Health Care, Utilities, and Consumer Staples — have slight positive returns between 0 and +2.9%. This is significant when the broad market has experienced an almost double-digit drawdown and other cyclical sectors like Consumer Discretionary and Technology are down -15.1% and -14.5%, respectively.1
Our business cycle study — using data since 1960 — finds that defensive sectors outperformed the broad market by more than 10% on average during six of the seven last recessions.2 Interestingly, the YTD performance story almost perfectly matches these historical results.
But with eight months still left in the year, how will this economic and market cycle evolve with tariffs at the forefront of fiscal uncertainty?
While we’ve experienced a notable market decline, the 90-day pause on reciprocal tariffs adds a longer runway to the key risk responsible for derailing the markets. One way to help insulate portfolios is to limit exposure to US companies that generate significant revenue overseas.
Figure 1: Revenue Exposure for US Sectors
| Sector
|
US (%) |
International (%) |
Top 3 International (%) |
Utilities |
98.3 |
1.7 |
Canada (0.9), Mexico (0.5), Chile (0.1) |
Real Estate |
82.4 |
17.6 |
UK (2.3), Canada (1.8), China (1.3) |
Financials |
70.9 |
29.1 |
China (3.3), UK (2.6), Japan (1.7) |
Health Care |
67.1 |
32.9 |
China (4.0), Germany (2.7), Japan (2.3) |
Industrials |
66.5 |
33.5 |
China (3.7), Canada (2.5), UK (2.3) |
Energy |
65.7 |
34.3 |
China (5.8), Canada (3.4), UK (3.3) |
Consumer Discretionary |
65.3 |
34.7 |
China (5.6), Netherlands (4.0), Germany (2.9) |
Consumer Staples |
63.0 |
37.0 |
Canada (4.0), China (3.6), Mexico (1.8) |
Communication Services |
60.6 |
39.4 |
China (4.9), UK (2.4), Australia (1.8) |
Materials |
49.4 |
50.6 |
China (6.1), UK (5.1), Germany (3.4) |
Information Technology |
45.4 |
54.6 |
China (12.6), Singapore (4.3), Taiwan (3.9) |
Source: FactSet as of March 31, 2025.
Reducing exposure to US Tech, which generates 55% of total revenue overseas, to overweight Utilities, which generates less than two percent of revenue outside the US, significantly reduces trade war impact. Trade amendments with China likely will have an outsized impact relative to other foreign countries.
Given the stark difference in returns YTD and tariff risks yet to fully materialize, consider sector ETFs for targeted exposures to stocks you aim to overweight/underweight.
How We Can Help
The State Street SPDR® ETF Strategy team offers educational resources to help you and your clients understand sectors and how to invest in them.
- Sector Investing: A Powerful Portfolio Construction Tool
- Sector Business Cycle Analysis
- GICS Sector and Industry Map
By combining education and strategic guidance, you can help clients make informed decisions about adding sector ETFs to their portfolios, while ensuring alignment with their broader financial goals.
If you have questions or want to learn more about sector investing, please contact us. And let us know if there’s a question From the Field that you’d like us to tackle in a future article.
The State Street SPDR® ETF Strategy team has the privilege of meeting regularly with financial advisors across the industry. These conversations provide a unique window into the challenges you face — and enhance our dedication to supporting you with the products and insights you need to better serve clients and grow your practice.