Various stock market indicators flashed warning signs in the first half of 2025 after the implementation of President Donald Trump’s tariffs policy in early April.

One of the most well-known sentiment gauges, CNN’s Fear & Greed Index , wallowed in “Extreme Fear” territory through April 21 before recovering to “Extreme Greed” as of July 17.

This benchmark measures market sentiment using factors such as stock price momentum, put and call options , and volatility.

Meanwhile, the Cboe Volatility Index ( VIX ) – which tracks expected volatility in the S&P 500 based on options pricing and is often called Wall Street’s “fear gauge” – surged as high as 60.13 on April 7.

A rising VIX suggests that investors are preparing for more market turbulence ahead.

The “normal” range for the VIX is between 12 and 20.

Adding to the concern is the Buffett Indicator , which compares the total U.S. stock market’s value to gross domestic product ( GDP ).

As of July, it sits at 209%, well above historical norms.

Even Warren Buffett himself appears cautious – his company, Berkshire Hathaway (BRK.B), is sitting on a record $348 billion in cash while trimming long-held positions in his portfolio.

If you’re looking to take a defensive approach and protect your portfolio against potential downside risk, defensive ETFs can help. Here’s what you need to know.

What makes an ETF defensive?

For equity exchange-traded funds, defensiveness is often measured by beta , a metric that tracks how much an ETF fluctuates relative to the overall stock market.

Think of an ETF as a ship and the market as the sea – if the sea gets rough, a sturdy, well-balanced ship (low-beta ETF) will sway far less than a smaller, top-heavy vessel (high-beta ETF).

Since the market has a beta of 1, defensive ETFs tend to have a beta well below that, meaning they experience smaller price swings on average.

Some ETFs are explicitly designed for low volatility. For instance, certain funds screen stocks from the S&P 500 based on their historical beta, selecting only the least historically volatile subset of stocks.

Other ETFs naturally have lower beta due to the defensive sectors they target. Consumer staples, healthcare and utility funds tend to be more stable since demand for food, medicine and electricity remains inelastic – meaning people continue to buy these essentials regardless of economic conditions.

For bond ETFs , defensiveness is a function of credit quality and duration. ETFs holding high-quality bonds , such as U.S. Treasuries, tend to be more resilient during downturns since investors flock to them as safe havens.

On the other hand, high-yield “junk” bond ETFs may see steep losses as the creditworthiness of their issuing companies gets called into question during economic downturns.

Similarly, bond ETFs with lower duration tend to hold up better when interest rates rise. Duration measures a bond’s sensitivity to interest rate changes, so short-term bond ETFs are less volatile than long-term bond ETFs, which suffered significant losses in 2022 amid rising rates and high inflation .

A common mistake with defensive ETFs is using them tactically – that is, rotating into them after a market downturn to try and minimize losses. This is just market timing; a strategy that often backfires as investors tend to react too late after much of the damage has already been done.

If you’re going to invest defensively, it should be a long-term component of your allocation strategy. Have a plan for how much exposure to defensive ETFs you want and when to rebalance, and stick to it.

How we chose the best defensive ETFs to buy

We screened out ETFs that rely on complex, derivative-based hedging strategies. These products, while useful for institutional investors and advisers, tend to be costly and impractical for DIY retail investors.

Instead, we focused on fixed-income and equity ETFs that demonstrated resilience during major downturns – particularly the March 2020 COVID-19 crash and the 2022 bear market . These periods were stress tests for defensive assets, revealing which ETFs effectively preserved capital when markets sold off.

We also screened for reputability, ensuring that each ETF has sufficiently high assets under management (AUM) – a key measure of fund size. ETFs with low AUM face a higher risk of closure , and those with low trading volume tend to have wider bid-ask spreads, making them more expensive to buy and sell.

Finally, cost matters, so we prioritized ETFs with reasonable expense ratios. There’s no point in avoiding market losses if high fees erode your potential gains.

Data is as of July 15. Dividend yields on equity funds represent the trailing 12-month yield, which is a standard measure for equity funds. Yields on bond funds are SEC yields, which reflect the interest earned after deducting fund expenses for the most recent 30-day period.

Your stock sector knowledge might not be a popular topic at this weekend’s dinner party, but it can be handy when you invest. Certain sectors tend to perform better or worse in certain market cycles, so understanding these cycles can help you target both sectors to invest in and sectors to avoid.

Stock cycle diversification means concentrating your portfolio in certain sectors and avoiding others based on the market cycle. Historic trends suggest some sectors perform better when the cycle is bullish, while others offer protection when the bear prowls. Though it’s tricky, seasoned investors can often tell when a cycle change is in store. The other challenging thing is knowing when to stop chasing a bull or bear.

A “ bull market ” is the opposite. Between 2017 and 2021, there was a long bull market with only minor disruptions. During that stretch, the S&P 500 more than doubled, helped by government stimulus, strong earnings, and historically low interest rates .

When investors discuss market cycles, the conversation turns zoological. Stocks slid into a “ bear market ” in 2022 as inflation spiked and Russia invaded Ukraine. In a bear market, stocks generally fall for an extended period—characterized in this instance by a 20% drop in the S&P 500 Index from its previous high.

Have you started saving toward retirement? If so, great! But how do you decide what to invest in?

Market cycles: Bulls vs. bears

A bull or a bear market won’t walk up and shake your hand to let you know it’s here, but you can get a sense of the market cycle by watching your portfolio and the broader market each day. Bull and bear markets are closely related to economic trends.

If a bull market has lasted a long time amid a roaring economy, signs of a change often appear. This could mean rising interest rates, inflation, or maybe a few months of poor economic data. That’s when you might consider getting exposure to “defensive” sectors, or ones that don’t tend to lose as much ground in a bear market.

If the country is in a recession and the market cycle has been bearish, you might be able to sense a bull amid rising jobs growth, company earnings, and oil prices. These often indicate better demand from companies and consumers. Then you can adjust your sector investing accordingly and pick some “cyclical” sectors, or ones that tend to rise and fall with the economy.

Defensive vs. cyclical sectors

Defensive sectors. Everyone needs to eat, stay healthy, and turn on the lights, even when the market (and the economy) is in a losing stretch. That’s why companies that make food, household products, medicine, and electricity often suffer less in a bear market, and are thought of as “defensive.” Examples include:

Health care

Utilities

Consumer staples

Cyclical sectors. A booming economy that creates demand for gasoline, vacations, dining out, housing, cars, semiconductors, and construction materials tends to help “cyclicals.” Examples include:

Energy

Industrials

Materials

Real estate

Financials

Consumer discretionary

Information technology

Sector investing and market cycles

A sector investing strategy is a bit more involved than popular techniques like index investing. An index investor buys a mutual fund or an exchange-traded fund (ETF) to track the performance of a major index, such as the S&P 500.

The problem with index investing: You’re a prisoner of the index and can’t use your sector knowledge to smooth out the ride during different market cycles. If you have most of your money in the S&P 500 and it has a bad year, so do you. The S&P 500 is heavily weighted toward cyclical sectors such as technology, consumer discretionary, and financials, so when the market cycle heads into bear territory, being in an S&P 500 fund means your money is like a deer in the headlights waiting to get crushed.

A sector investing strategy tries to avoid this.

Sector investing examples: COVID-19 strategy

Imagine a hypothetical investor and how they might position themselves from a sector standpoint back in March 2020 when COVID-19 hit. Major indexes rapidly declined all around the world as economies shut down, and interest rates fell sharply as central banks loosened credit conditions to encourage borrowing and spending.

Strategy one. The investor might decide on a so-called “risk-off” strategy, trying to lower their potential risk in this complex fundamental environment. One way to reduce risk would be putting money into the defensive sectors, such as utilities and consumer staples. Utilities and staples companies provide necessities like food and electricity, making them better able to weather a rough patch.

Also, in a low-interest-rate environment, where money in the bank or treasury bonds would provide little or no return, a large dividend—which many staples companies and utilities offer—looks appealing.

Strategy two. The hypothetical investor facing the pandemic might get a bit more aggressive and put money into health care, hoping it has a built-in advantage. Any COVID-19 vaccine, the investor presumes, would come out of this sector, and whichever company got it to market first would benefit. Rather than trying to zero in on a single company among many working on a vaccine, the investor buys a health care or biotech ETF, and perhaps sees benefits from the entire sector when a vaccine arrives.

Option two is more risky, and certainly could fail if a vaccine is not found quickly. Also, health care had challenges during the pandemic, with many patients putting off surgical procedures because of lockdowns. This hurt hospitals and was also bearish for medical device companies that make replacement hips and knees.

The bottom line

Sector investing isn’t something you can just jump into. But if you watch the markets for a while, cycles and sector performance start making more sense. COVID-19 and the market’s reaction to it taught even the most seasoned sector investors some new lessons.

The challenge with a sector strategy is knowing when to stop the chase. It’s easy to get carried away by gains in a bull market, but hard to take money off the table when you’re ahead. Taming your emotions is key.

As Trump’s trade war led stocks to post their worst first quarter since 2022, diversification proved its worth.

Key Takeaways

Tariffs upended the rosy outlook for stocks, sending the market down more than 4% in the first quarter—its worst start to a year since 2022.

Technology stocks posted their worst first quarter since 2020, while value stocks and defensive sectors like healthcare rose.

Non-US stock markets far outperformed US stocks, led by rallies in Chinese and European stocks.

Bonds were a safe haven, as prices rose despite the Federal Reserve holding off on cutting interest rates.

After two years of relatively smooth sailing and blockbuster returns for stocks, the first quarter of 2025 was a rude awakening. President Donald Trump’s trade wars changed the market conversation from a focus on a “soft landing” for the economy and Federal Reserve interest-rate cuts to worries about tariffs reviving upward pressure on inflation, collapsing consumer confidence, and rising odds of a recession.

The result was a sharp turn lower in the US stock market from record highs in mid-February to a correction, with a 10% drop from the market’s peak. Leading the declines were the hottest stocks of 2024, especially the names at the center of the artificial intelligence boom.

Looking through the volatility, however, stocks haven’t fallen as far as some gloomy headlines might suggest. The Morningstar US Market Index dropped more than 4% in the first quarter, but it’s up more than 7% over the past year.

Not only that, but there were havens for investors with diversified portfolios. Value stocks, which had been left in the dust the by the big rally in tech, rose during the first three months of the year, with gains among dividend stocks, consumer defensives, and healthcare names. Non-US stock markets rallied. Treasury bonds also posted gains, living up to their traditional role as ballast for portfolios.

Strategists say investors should brace for more volatility in the months ahead, especially with more tariff announcements to come from the Trump administration. However, many are still constructive on the outlook for markets over the longer term.

Key Stats: Q1 2025 Stock and Bond Market Performance

Stocks finished the quarter down 4.63% after entering correction territory in mid-March. It was the market’s worst quarter since the second quarter of 2022, when stocks fell 16.85%.

after entering correction territory in mid-March. It was the market’s worst quarter since the second quarter of 2022, when stocks fell 16.85%. Value stocks took the lead over growth stocks, with the Morningstar US Value Index returning 4.44% compared with a 9.24% loss for the Morningstar US Growth Index.

compared with a 9.24% loss for the Morningstar US Growth Index. The Morningstar US Core Bond Index gained 2.78% after losing 3.04% in the fourth quarter. Yields fell slightly but remain attractive by historical standards, according to analysts.

after losing 3.04% in the fourth quarter. Yields fell slightly but remain attractive by historical standards, according to analysts. Dividend stocks rose in the first quarter as the broader market fell. The Morningstar Dividend Composite Index gained 2.23%, compared with the market’s 4.63% loss.

The Fed held interest rates steady in January and March but telegraphed that two 0.25-percentage-point rate cuts would happen later in the year.

Gold and copper prices surged on tariff fears, while oil prices fell.

Bitcoin and other cryptocurrency prices plunged alongside tech and AI stocks.

Q1 Stock Market Performance

The technology stocks that propelled the market higher for the better part of two years dragged it lower in the first quarter. Chip giant Nvidia NVDA saw losses of more than 19%, while Alphabet GOOGL/GOOG lost 18% and Tesla TSLA plunged more than 35%. One side effect of those losses was a significant drop in valuations across the mega-cap tech sector and the stock market more broadly.

Stocks entered official “correction” territory in mid-March, falling more than 10% from their most recent peak in February, though the market finished the quarter off its lows.

The Morningstar Wide Moat Composite Index, which is made up of stocks our analysts believe have the largest and most durable competitive advantages, fell 6.58% for the quarter. That’s a 180-degree turn from its 3.69% return in the fourth quarter and 8.61% return over the past year.

The first quarter also brought a rotation, as investors sought safety (and bargains) outside of last year’s winners. Energy and healthcare stocks, which lagged in the fourth quarter, surged ahead. International markets like China and Europe also soared after lagging the US in recent years.

Stock Market Pullbacks

Value vs. Growth Performance

As Big Tech stumbled, value stocks took the lead over growth stocks. The US Value Index gained 4.44% for the quarter, while the US Growth Index fell 9.24%. Within the style box, large-cap value gained 5.95%, the best return of any category. Large-cap growth stocks lagged, falling 7.53%. Small caps struggled across the capitalization spectrum, with small-cap growth notching the worst return of any category.

US Equity Style Box Performance

Stock Sector Performance

Of the 11 major stock sectors, the worst losses came from consumer cyclicals. After climbing 10.47% in the fourth quarter of 2024, the category plunged 12.83% in the first quarter, as worries about declining consumer confidence, higher interest rates, tariffs, and a broader economic slowdown dragged on stocks.

The tech sector didn’t fare much better, ending the quarter down 12.06% after dominating the market for the better part of the last two years. It was the Morningstar US Technology Index’s worst quarter since the second quarter of 2022, when it lost 22.33%.

The best performance came from energy stocks, which gained 9.03% in the first quarter, even as oil prices fell. Healthcare stocks also fared relatively well, rising 5.45%.

Q1 Dividend Stock Performance

Dividend stocks outperformed the broader market in the quarter as investors searched for steady, reliable cash flow in an uncertain environment for equities. The Morningstar Dividend Composite Index was up 2.2%, compared with the market’s 4.6% loss.

The Morningstar Dividend Leaders Index, made up of the 100 stocks from the Composite Index with the highest yields, gained 9.0%. The Morningstar US Dividend Growth Index rose 1.4%.

Federal Reserve Still on Hold

After cutting rates by a full percentage point in the fall of 2024, the Fed kept interest rates steady at its first two policy setting meetings of 2025. The target range for the federal-funds rate is 4.25%-4.50%, lower than the peak of 5.50% last summer but still high enough to be considered restrictive.

Complicating the picture for central bankers is ongoing uncertainty surrounding fiscal, trade, and other policy in Washington. With the effect that new tariffs and tighter immigration restrictions will have on the economy still unknown and inflation still above the Fed’s target, central bankers are kicking the can down the road. Analysts agree that widespread tariffs will likely result in higher inflation, but it’s not yet clear whether this will be short-lived and allow the Fed to resume cutting interest rates.

Treasury Yield and Federal-Funds Rate Source: Federal Reserve Economic Database. Data as of March 31, 2025.

Global Market Performance

As the US stock market lost ground in the quarter, international markets surged amid a global shift. Chinese markets gained 14.17%, while eurozone markets rose 12.24%, thanks in part to major fiscal initiatives designed to stimulate growth and enhance the region’s defense capabilities amid the ongoing conflict between Russia and Ukraine.

In March, German spending plans that broke the country’s long-standing tight fiscal discipline boosted stocks and bond yields. German markets rose more than 15% for the quarter, UK markets rose 8.44% and Japanese and Canadian markets also ended the first quarter in the green after tumbling at the end of last year.

Q1 Bond Market Performance

The bond market remained mostly in the green in the first quarter as equities sold off and investors sought safety in fixed income. That was a sharp contrast with the fourth quarter, when stocks soared as bonds struggled. Yields on the 10-year Treasury note dropped to 4.23% at the end of the quarter after peaking at 4.79% in early January. Bond yields move in the opposite direction of prices.

The US Core Bond Index returned 2.78% for the quarter. Investors in TIPS fared better; that category returned 4.25% amid investor expectations for stickier inflation and slower economic growth. Only municipal bond investors saw negative returns.

Yield Curve Continues to Steepen

After un-inverting last year, the Treasury yield curve steepened slightly. The curve is a graphical representation of government bond yields across different maturities, most commonly two-year and 10-year Treasury notes. It’s a measure of how much compensation bond investors expect for the extra risk of having money locked up with the federal government for longer periods.

At the end of the first quarter, the spread between the 10-year and two-year Treasury yields was 0.34 percentage points, up slightly from 0.31 points at the end of the fourth quarter.

U.S. Treasury Yield Curves Source: Federal Reserve Economic Database. Data as of March 31, 2025.

Stock and Bond Market Volatility

Stock market volatility rose across the US, developed, and emerging markets in the quarter as investors grappled with an evolving outlook. In the United States especially, stocks have whipsawed daily on developments surrounding tariffs and economic data releases. Meanwhile, bond market volatility was flat compared with the previous quarter as yields remained range-bound.

Commodity Market Performance

With tariffs looming and trade uncertainty persisting, gold prices have lifted. Investors often treat gold as a hedge against economic downturns, geopolitical unease, or stubborn inflation—scenarios that have been top of mind for investors these past few months. Gold futures prices rose 17.45% to record highs over the first quarter.

Copper prices have seen an even more dramatic run amid fears that Trump will impose tariffs on the key industrial material. Copper futures prices rose 25.86% in the quarter.

West Texas Intermediate crude prices—a benchmark for American oil prices—fell slightly as tariff developments dampened global demand and the major oil-producing countries agreed to increase production this year.

Commodity Futures Performance Source: Morningstar. Data as of April 01, 2025.

Cryptocurrency Performance

Bitcoin tumbled in the quarter alongside tech stocks, falling 12.57%, compared with a gain of more than 52% in the last quarter of 2024. Cryptocurrencies and their related financial assets saw a boost after Trump’s election to a second term, but they lost significant ground as investors rotated away from riskier investments and the outlook for growth slowed.

Ether, the second-largest cryptocurrency, fell 45.62% between January and March.

UK defensive stocks often regain popularity during times of market volatility. Discover the protection this sector can provide to investor portfolios.

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Whenever the economy or stock market enters into a state of heightened volatility, the popularity of UK defensive stocks increases. Investing in these businesses is often viewed as a safe haven against rapidly fluctuating stock prices.

But what exactly are they? And why does this strategy help protect wealth? Let’s dig in.

What are defensive stocks?

A defensive stock is a general term to describe any equity whose underlying business generates a reliable cash flow even during times of economic uncertainty. These are generally mature industry leaders offering products or services always in demand.

Defensive companies aren’t known for delivering exceptional growth. And during bull markets, they typically underperform benchmark indexes like the FTSE 250 or S&P 500. But since earnings have a habit of consistently pouring in, they regain favour in bear markets, even more so among income investors who seek reliable and consistent dividends.

Defensive vs. cyclical stocks

The opposite of defensive stocks is cyclical stocks. These businesses are highly susceptible to external factors beyond their control, such as the macroeconomic environment. As a result, owning cyclical companies can be a bit of a roller-coaster ride, surging when times are good and plummeting when things turn sour.

Typically, cyclical businesses offer products or services that aren’t always in fashion due to fluctuations in supply and demand.

For example, consumer discretionary retailers tend to suffer during economic uncertainty as households seek to cut unnecessary spending. Alternatively, if the price of a metal plummets due to oversupply, mining companies can struggle to deliver impressive earnings.

Top UK defensive stocks

Here are some of the top defensive stocks in the UK by market cap as of March 2025.

Company Market Cap Industry Description Unilever (LSE:ULVR) £114.4bn Personal Care, Drug and Grocery Stores One of the larger consumer staples retailers in the world offering food, personal care, and home care products British American Tobacco (LSE:BATS) £69.6bn Tobacco One of the largest cigarette companies in the world, offering a wide range of tobacco-based products Reckitt Benckiser Group (LSE:RKT) £35.5bn Personal Care, Drug and Grocery Stores Offers a wide range of hygiene and consumer healthcare products that can be found in most supermarkets globally Imperial Brands (LSE:IMB) £22.6bn Tobacco The sixth-largest tobacco business worldwide diversifying into vapour and heated tobacco products Tate & Lyle (LSE:TATE) £2.4bn Food Producers One of the oldest British ingredient supplier companies for food and beverages

Unilever

Unilever Plc is a fast-moving consumer goods company that offers food, personal care, and home care products. Since being established in 1894, the firm has expanded into one of the largest branded consumer staple businesses within the United Kingdom.

Its products can be found in almost all major supermarkets and include items such as Hellmann’s mayonnaise, Ben & Jerries ice cream, Dove shampoo, Peril washing up liquid, and Cif surface cleaner, among hundreds of other brands.

British American Tobacco

British American Tobacco is the third-largest cigarette company in the world. Based in London, the company manufactures and sells a wide range of tobacco-based products, including combustible tobacco, loose tobacco, and oral nicotine.

With healthcare scrutiny its industry rising, management has been ramping up internal investments into less harmful product lines, namely electronic cigarettes and heated tobacco. Today, it hosts a wide portfolio of brands, including Dunhill, Kent, Pall Mall, and Rothmans, among others.

Reckitt Benckiser Group

Reckitt Benckiser is a global consumer goods enterprise targeting the hygiene, consumer healthcare, and nutrition market sectors. It’s worth noting that the majority of its brands are found in the first two areas, which are typically underserved by its competitors, like Unilever.

Its products can be found in supermarkets worldwide, including brands such as Air Wick, Finish, Woolite, Clearasil, Durex, and Veet.

Imperial Brands

Imperial Brands is the sixth-largest tobacco company globally, with headquarters in Bristol. It offers a range of tobacco-based products such as cigarettes, loose tobacco, rolling papers, and cigars. After some industry consolidation, the group now owns and operates multiple globally recognised brands, including Winston, West, Davidoff, Gauloises, and Rizla.

In recent years, the firm has been focused on expanding its next generation product line through its newly introduced Pluze heated tobacco solution and Blu vaporisation devices.

Tate & Lyle

Tate & Lyle is a food producer based in the UK that provides ingredients for beverages, various soups, sauces, and food dressings. One of its most famous brands, Lyle’s Golden Syrup, was sold off in 2010 as part of management’s strategy to veer away from sugar-based products.

Today it focuses on a wide range of alternative products that can be found in pre-prepared meals or bought individually from supermarkets, including soups, stews, broths, mayonnaise, yoghurt, ice cream, soft drinks, juice, and coffee and tea.

Top defensive sectors

There are quite a few defensive sectors for UK investors to choose from. So, let’s go through the four most popular.

1. Consumer staples

Regardless of what the economy might be doing, there are some things that we simply can’t live without. As such, consumer staples products are often the last to be reduced or eliminated from a shopping list. This includes food, drinks, hygiene, and for some, tobacco.

Branded staples products can experience a reduction in sales volume. But this is typically offset by raising prices. Meanwhile, supermarkets and other staples retailers can sometimes see a surge in overall volumes as households stock up on essentials in fear of worsening economic conditions.

2. Utilities

The economy may be in tatters, but without water, electricity, or gas, businesses and households cease to function. Consumption can drop as individuals seek to cut usage, but this tends to have a negligible impact on the industry.

3. Real Estate

Thanks to the creation of real estate investment trusts, it’s become easy for investors to tap into the property market without needing to take out a mortgage. But the real estate industry is quite vast, containing many different sub-sectors for various property types, each of which behaves differently during economic turmoil.

Households and apartments – People need shelter. Subsequently, the default rates on rents and mortgages tend to remain low as consumers cut discretionary spending to meet their monthly rent.

– People need shelter. Subsequently, the default rates on rents and mortgages tend to remain low as consumers cut discretionary spending to meet their monthly rent. Offices and retail parks – With consumer spending dropping, businesses, especially front-end discretionary retail, can struggle financially. As such, office spaces and retail park lots can end up becoming vacant. And finding a suitable replacement tenant during an economic wobble can be difficult. As such, these types of properties end up losing value.

– With consumer spending dropping, businesses, especially front-end discretionary retail, can struggle financially. As such, office spaces and retail park lots can end up becoming vacant. And finding a suitable replacement tenant during an economic wobble can be difficult. As such, these types of properties end up losing value. Warehouses, factories, and hospitals – Industrial properties are often at the heart of most operations and are typically the last to go should a downsizing occur. But if tenants are large established enterprises, the default rate typically remains low, maintaining rental cash flow and property values.

4. Healthcare

Even if the cost of living goes up, patients still need access to medicine and healthcare facilities, regardless of price. As such big pharma, hospitals, and other healthcare services businesses tend to continue chugging along nicely.

The exception is young biotech. As these companies often don’t have a meaningful revenue stream, they remain dependent on external financing, whose availability tends to decline while the cost of borrowing increases during periods of economic uncertainty.

Investing in international defensive stocks

The process of investing in defensive stocks outside the UK is nearly identical. However, there are a few extra parameters to consider.

With international stocks being listed on foreign exchanges in different currencies, any share price returns or dividends received could be adversely impacted in pound sterling terms. And when economies are wobbling, volatility in exchange rates is not uncommon.

Another factor to think about is industry regulation. Much like in the UK, sectors like healthcare, utilities, and real estate are all subject to slightly different regulatory requirements in different countries. As such, a valid British investment thesis may be invalid in international markets like the US.

When is the best time to invest in defensive stocks?

As previously mentioned, investors often rush towards defensive stocks throughout every period of economic instability. By staying in the stock market versus moving to bonds, gold, or UK gilts, investors can still generate relatively low-risk returns through dividends from this class of equities.

Unfortunately, this is where a timing problem emerges.

When a bull market starts to ramp up, defensive stocks often lose favour due to their underperformance, and investors migrate back towards cyclical growth. This causes the share prices of these mature businesses to drop, causing more investors to move on.

Yet, despite the slow downward trajectory of the defensive stocks in this situation, the underlying businesses are still chugging along. With cash flow supporting dividends, the yield rises. This actually creates buying opportunities for value investors. And it’s a tactic that Warren Buffett is constantly deploying.

However, eventually, catastrophe will hit again. And as investors decide defensive stocks are now the best place to be, share prices rise, pushing the yield down.

Subsequently, anyone that’s late to the migration ends up owning overvalued defensive shares with a low dividend yield. They won’t benefit as much from the income returns during the economic turmoil. And in some circumstances, when growth stocks regain favour, they could actually lose money as their overvalued stock drops.

With that in mind, the best time to buy defensive shares is often during a bull market when they’re cheap and sell during a bear market when they’re expensive – the complete opposite of what most emotionally-driven investors do.