It used to be that if you were looking to get ideas about defensive stocks to buy, you would focus on the holdings of consumer staples exchange-traded funds. Today, however, there are many more ETF options available.
One option is low-volatility funds. They are designed to lag the market slightly when things are going well, while offering more downside protection when things are going wrong.
Low-volatility funds became popular after the 2008/2009 financial crisis. In recent years, they were out of style until 2022, when they experienced their first annual inflows ($6.5 billion) since 2019. A significant correction in the S&P 500 last year helped their popularity.
The largest low-volatility fund in the U.S. is the iShares MSCI USA Min Vol Factor ETF (BATS:USMV). It tracks the performance of the MSCI USA Minimum Volatility (USD) Index, which is a collection of mid- and large-capitalization U.S. stocks that have lower volatility than the entire U.S. mid- and large-cap equity market. The ETF currently has 164 holdings.
Based on the fund’s holdings, here are three defensive stocks to buy now.
Berkshire Hathaway (BRK.B)
Berkshire Hathaway (NYSE:BRK.B) is one of the best non-fund funds you can own. Sure, it’s not a mutual fund per se. However, its equity portfolio alone has a value of more than $347 billion.
Shareholders gain ownership in many private companies that Warren Buffett and his team have bought over the years.
And you get all of that for zero fees.
In 2020, Berkshire started investing in Japan’s largest trading houses. One of the trading houses, Itochu (OTCMKTS:ITOCY), is the holding company’s 12th-largest holding, representing 0.9% of its equity portfolio.
That investment translates into a 6.2% ownership stake. As a result, his return on Itochu has nearly doubled in just two years.
Berkshire might not always beat the S&P 500. However, it delivers positive returns in most years. For example, the 2022 shareholder letter shows that since 2000, Berkshire’s stock has lost ground in only four of 23 years, two less than the index.
If you like sleeping well at night, Berkshire is one of the defensive stocks to buy that won’t let you down.
However, over the past 15 years, PepsiCo’s annualized total return through April 18 was 8.16%, 115 basis points higher than Coca-Cola’s. Further, PepsiCo’s five-year average total yield is 3.75% — defined as the dividend yield plus buyback yield — 50 basis points higher than Buffett’s favorite cola maker.
The two companies differ in one significant way.
PepsiCo has a huge food business with Frito Lay and Quaker Foods — in 2021, its food-related businesses accounted for 58% of its annual revenue — while Coca-Cola has a negligible amount. In recent years, Coke has added an alcoholic drink segment, and PepsiCo has followed suit. So the competition continues to heat up. Where it ends, nobody knows.
Frito Lay North America generated 27% of PepsiCo’s $86.4 million in 2022 net revenue and 44% of its operating income. So it’s a significant driver of PepsiCo’s share price.
In 2023, PepsiC0’s stock is up 2.92% year-to-date, 184 basis points higher than Coca-Cola’s. The latter might have higher margins, but the former seems to be more popular with investors. Well, at least if stock returns are your barometer.
Hershey Foods (HSY)
I’m a Hershey Foods (NYSE:HSY) fan for two reasons.
First, CEO Michelle Buck is one of the best leaders in corporate America and an inspiration to businesswomen everywhere. However, in 2017 when she became the first woman CEO of Hershey, she wasn’t an overnight success.
Buck spent 15 months at Frito-Lay after completing her MBA in 1987. She then moved to Kraft, where she rose the ladder over 17 years to become Vice President of Marketing for Kraft Foods.
Then, in April 2005, Buck jumped to Hershey to become its Senior Vice President and Global Chief Marketing Officer. Twelve years later, she was CEO.
Second, how can you not root for a company controlled by a trust that supports the Milton Hershey School, “a school for the full-time care and education of disadvantaged children?” It has approximately 2,000 students ranging from pre-Kindergarten through 12th grade.
The Milton Hershey School Trust controls 79.5% of the company’s voting shares.
As for the company itself, Hershey announced on April 17th that it was acquiring two popcorn manufacturing plants from Weaver Popcorn Manufacturing, a leader in popcorn production and co-packing. Weaver co-manufactures Hershey’s Skinny Pop brand. The acquisition ensures the company can continue growing Skinny Pop in the years ahead.
In 2022, Hershey generated $1.81 billion [cash flow] in free cash flow from $10.42 billion [income statement] in revenue, good for a 17.4% margin.
Hershey should be fine in a downturn unless Americans stop eating sweets and snacks.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.