3 sectors to consider investing in when the stock market is volatile

1. Investing in the health care sector

The health care sector has many attractive qualities, especially for Canadian investors looking to protect their wealth during periods of market volatility while achieving growth over the longer term. The reason? The developed world’s aging population, a demographic force sometimes referred to as the “grey tsunami.”

“Health care is one of the very few areas of the market that’s really well positioned for the aging population dynamic,” says Paul MacDonald, chief investment officer at Harvest ETFs. “The macro-backdrop is very strong.”

This picture includes projections from the United Nations that roughly one-third of the populations of North America and Europe will be over age 60 by 2050. The spending outlook tracks this demographic trend. According to the U.S. National Health Statistics Group, the annual average health care spend by individuals doubles to more than USD$10,000 once people reach the 45-to-64 age category. It doubles again for those in the 65-plus zone.

Health spending is also what’s known as a “superior good.” That means people will spend a greater proportion of their income on health care products and services as their income increases. That bodes well for the sector on an international basis, as the standard of living improves in developing economies such as China and India.

Health care companies also have a greater degree of pricing power in that people need their products and services regardless of ups and downs in the market. The sector’s track record on innovation also means it has strong potential to develop new opportunities and markets.

The whole space is innovative, whether it’s a company developing robotics-assisted surgical techniques or a pharmaceutical company researching obesity medications, says MacDonald. “Health care companies have significant tailwinds for growth.”

Harvest ETFs captures health-sector opportunities with its Harvest Healthcare Leaders Income ETF (HHL). It holds a diversified portfolio of 20 large-cap health care companies with strong track records. Taken together, they offer diversification in product lineups, innovation and geography, providing investors with opportunities for long-term growth in addition to overall stability.

Harvest ETFs also uses an active covered-call strategy to offer enhanced monthly cash distributions to unitholders. (Read more about how covered-call ETFs work.)

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2. Investing in utilities

Companies that generate power, operate electricity transmission and distribution systems, manage water supplies, or provide telecommunications may not be as sexy as hot tech stocks, but they may appeal to Canadian investors seeking solid yields and stable prices over time.

“You won’t find runaway growth in a lot of these companies,” says Harvest ETFs portfolio manager Mike Dragosits. “The trade-off is you get a steady growing profile over time. You won’t be in the hot sector-of-the-month that everybody is talking about. But the companies will chug along and generate cash flows for investors.”

So, why do many investors overlook utilities? Complexity has a lot to do with it. Utilities operate in highly regulated business sectors. For retail investors, poring over regulatory documents and understanding regulatory regimes—and regulatory risk—in the jurisdictions where companies operate is daunting. And there’s no exciting growth story at the end to reward those who power through the paperwork. 

Still, utility companies benefit from several attributes. They provide services—energy, electricity, water, communications—that everybody needs and consumes more or less daily. Demand is relatively consistent, offering protection through market cycles. As large, capital-intensive businesses, they also often hold monopoly-like positions in their markets. Potential competitors face massive barriers to entry, enhancing the ability of utility companies to maintain prices (although that pricing power is often subject to regulation).

The challenge, though, is managing risk. Disasters, such as 2022’s wildfires in California, can destroy infrastructure. The impacts of climate change are equally concerning, as is the potential for governments to change regulations in ways that impact corporate earnings. Market risk is another factor, although utilities tend to weather downturns better than high-growth sectors.

Dragosits says Harvest ETFs addresses sector risk in its Harvest Equal Weight Global Utilities Income ETF (HUTL) with diversification in subsectors and across geographies. “You’re getting not only Canadian exposure, but also U.S. and developed western market exposure,” he says.

The ETF holds a portfolio of 30 large-cap global utility firms that generate above-average yields, with equal weighting across equities to reduce single-stock risk. Like HHL, it also employs a covered-call strategy to enhance income potential.

3. Investing in brand leaders

Warren Buffett, one of the world’s most successful investors, has been photographed drinking Coca-Cola several times. The soft drink is emblematic of one of Buffett’s core investing tenets: Buy strong companies that make products you know and understand. His celebrated Berkshire Hathaway Inc. portfolio is strongly weighted toward famous household brands including—you guessed it—Coca-Cola.

There’s a solid investment theory behind Buffett’s strategy: Brand leaders have the market power to generate returns over the long term. “Brands are synonymous with positive experiences and good feelings,” says Michael Kovacs, CEO of Harvest ETFs. “That builds loyalty. As an investment, brands provide stability in earnings, which leads to growing dividends and growing market share.”

Top brands have long histories of growth, operating experience and recurring revenue, Kovacs adds, which lends them credibility as investments. They also have the strength to survive disruption in markets and bounce back quickly, offering investors greater stability.

Take the Harvest Brand Leaders Plus Income ETF (HBF), for example. The COVID-19 pandemic sent the global economy into a tailspin in 2020. Yet 13 of the 20 companies in HBF still raised their dividends on a year-over-year basis. Only Disney cut its dividend, but its shares still gained 22% that year. The company reinstated its dividend in February 2023.

Combined with Harvest ETFs’ covered-call strategy, HBF is a prime example of how the sector can generate stable investment income. Companies with strong brand recognition achieve reliable results due to several factors: They enjoy customer loyalty, allowing them to charge premium prices. (Think Nike.) They are diverse, covering international markets and bridging cultures. (Think MacDonald’s.) They have a proven ability to withstand economic turmoil, and they have track records for growth and dividends.

“We use the products from brand leaders. We buy them,” Kovacs says. “That builds strong underlying companies and makes brands a perfect investment for an equity-income strategy.”

Read more about investing:

• Best in show: How to find an invest in market leaders
• Get paid to wait—is now an opportunity to invest in tech stocks?
• 3 ways to recession-proof your RRIF
• What do rising interest rates mean for retirement savings?