Low-Correlation Defensive Stocks Outperform as S&P 500 Stalls
0h ago|5 min readStandard
Fazen Markets Editorial Desk
Collective editorial team · methodology
defensive-stockslow-correlation-investing
Fazen Markets Editorial Desk
Collective editorial team · methodology
Trades XAUUSD on autopilot. Verified Myfxbook performance. Free forever.
Risk warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. The majority of retail investor accounts lose money when trading CFDs. AiX is informational software — not investment advice. Past performance does not guarantee future results.
A review of equity performance identifies six defensive stocks as top performers due to their low correlation with the broader S&P 500 index, as measured by the SPDR S&P 500 ETF Trust (SPY). The stocks, led by General Mills and Merck, share a beta of 0.50 or lower, indicating muted volatility relative to the market. This characteristic helped several of these companies deliver positive returns in 2022, a year when the S&P 500 declined by over 16%. The analysis, based on financial data from August 2026, highlights a strategy for reducing portfolio risk through low-correlation assets.
Market volatility remains a persistent concern for investors. The S&P 500's 16% decline in 2022, driven by inflation and aggressive Federal Reserve rate hikes, demonstrated the impact of concentrated market risk. A historical strategy to mitigate such risk involves constructing a portfolio with assets that do not move in lockstep with the market. Modern Portfolio Theory, developed by Harry Markowitz, formalized this idea, showing that a mix of uncorrelated assets can produce superior risk-adjusted returns.
The current catalyst for examining low-correlation stocks is their demonstrated resilience. During the 2022 downturn, several sectors traditionally seen as defensive, like consumer staples and healthcare, outperformed. This counter-cyclical performance aligns with the economic principle that demand for essential goods and services remains relatively stable through business cycles. Investors facing an uncertain interest rate and growth environment are therefore scrutinizing assets that can provide portfolio stability.
Low correlation is quantified by a stock's beta. A beta of 1.0 means a stock moves in line with the market. A beta below 1.0 indicates less volatility than the market, while a beta above 1.0 signals higher volatility. Stocks with a beta of 0.0 have no correlation, and a negative beta implies an inverse relationship. The strategy focuses on stocks with a beta of 0.50 or lower, which are considered to have low market correlation.
The identified defensive stocks are Procter & Gamble (PG), Merck & Co. (MRK), Bristol-Myers Squibb (BMY), American Tower (AMT), General Mills (GIS), and McDonald's (MCD). Each possesses a beta of 0.50 or under compared to SPY, alongside positive fundamental metrics like return on equity and historical earnings growth. Their market capitalizations range from General Mills at $20.43 billion to Procter & Gamble at $333.72 billion.
A key performance comparison is their 2022 track record. While the S&P 500 lost over 16%, Procter & Gamble, Merck, Bristol-Myers Squibb, and General Mills all returned positive performance for the year as of September 2022. This highlights their defensive nature. American Tower was the sole exception among the group, posting a negative return that year. The data does not specify the exact returns for each stock, only their directional performance.
Dividend yield is another critical data point for these mature companies. The yields listed vary, with General Mills showing a dividend yield of 0.0641% and American Tower at 0.0405%. For context, the dividend yield for the SPY ETF is not provided in the source material for direct comparison. The payout ratios also differ significantly, from 0.000 for General Mills to 268.800 for Merck, indicating varying corporate policies on returning cash to shareholders.
Long-term performance data is available for General Mills. The company has a five-year monthly beta of 0.32, making it roughly a third as volatile as the overall market. Since 1993, with all dividends reinvested, GIS achieved a compound annual growth rate (CAGR) of 9.81%, slightly outperforming the SPY's CAGR of 9.72% over the same period.
| Ticker | Company | Price ($) | Beta (≤0.50) | Key Sector |
|---|---|---|---|---|
| PG | Procter & Gamble | 143.57 | Yes | Consumer Staples |
| MRK | Merck & Co. | 135.24 | Yes | Healthcare |
| BMY | Bristol-Myers Squibb | 66.50 | Yes | Healthcare |
| AMT | American Tower | 172.34 | Yes | Real Estate (REIT) |
| GIS | General Mills | 38.21 | Yes (0.32) | Consumer Staples |
| MCD | McDonald's | 266.78 | Yes | Consumer Discretionary |
The outperformance of low-beta healthcare and consumer staples stocks in 2022 signals a rotation into defensive sectors during periods of macro stress. This flow is typically driven by institutional investors and risk-averse retail money seeking shelter. The strategy's primary benefit is reducing overall portfolio volatility, which can prevent behavioral mistakes like panic selling during drawdowns. A portfolio incorporating these assets would likely see a higher Sharpe ratio, a measure of risk-adjusted returns.
A significant limitation of this strategy is opportunity cost. Defensive stocks often lag during strong bull markets fueled by low interest rates and high growth expectations. Investors who overweight these sectors may miss out on larger gains in more cyclical areas like technology. a low beta is a historical measure and does not guarantee future performance, especially during a crisis that uniquely impacts a specific sector, such as a regulatory change in healthcare.
Positioning data is implied by the performance. The positive returns in 2022 suggest these stocks were net bought, or at least held, while more cyclical names were sold. The analysis does not provide short interest data or institutional ownership changes. The flow into defensives is a classic risk-off trade, which often coincides with a flattening or inversion of the yield curve as growth expectations dim.
The performance of low-correlation stocks will be tested by upcoming Federal Reserve policy decisions and corporate earnings reports. Investors should monitor the Fed's statements on inflation and interest rates, as a pivot toward easing could reduce the relative appeal of defensive sectors. Conversely, a reaffirmation of a hawkish stance may prolong their outperformance.
Key technical levels for the S&P 500 itself will influence the strategy. A sustained break above previous all-time highs could trigger a rotation back into high-beta stocks, pressuring defensives. Conversely, a failure to hold major support levels, such as the 200-day moving average, would likely increase demand for low-correlation assets. Sector-specific catalysts, like drug trial results for Merck or Bristol-Myers Squibb, are also critical watchpoints.
Finally, watch the performance gap between the SPY and a basket of these low-beta stocks. A widening gap favors the defensive strategy, while a narrowing gap suggests market risk appetite is returning. Monitoring the relative strength of the Consumer Staples Select Sector SPDR Fund (XLP) versus the S&P 500 provides a broader sector-level view of this dynamic.
A defensive stock is from a company in an industry considered essential regardless of economic conditions, such as consumer staples or healthcare. A low-correlation stock has a historical beta—a measure of its volatility relative to the market—below 1.0, often below 0.50. This means its price movements are less tied to the swings of the overall market. These traits often overlap, making such stocks potential hedges during market downturns, though they may underperform during strong bull markets.
Beta quantifies a stock's sensitivity to market movements. A portfolio weighted toward stocks with low betas will generally experience lower volatility than the market. This reduces sequence-of-returns risk, where large drawdowns early in an investment period can severely impact long-term compounding. According to Modern Portfolio Theory, mixing low-beta assets with other uncorrelated assets can improve a portfolio's risk-adjusted returns, even if the absolute return is slightly lower.
AiX is our free MetaTrader 4 Expert Advisor. Verified Myfxbook performance. No subscription. No fees. XAUUSD breakout engine.
Trade 800+ global stocks & ETFs
Start TradingSponsored
Open a demo account in 30 seconds. No deposit required.
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
