With the S&P 500 off nearly 5 percent from its recent highs, some fund analysts are recommending defensive sectors, such as consumer staples and health care.

In a note out Monday, CFRA Research boosted its ratings on the defensive consumer staples and health care sectors while lowering its ratings on the cyclical energy and materials sectors.

What Happened

As has been widely noted, the health care sector is struggling this year. Amid political headline risk regarding Medicare For All and bipartisan efforts to push pharmaceuticals prices lower, the Health Care Select Sector SPDR (XLV), the largest health care ETF by assets, is up just 2.77 percent year-to-date compared to a gain of 15.28 percent for the S&P 500.

“CFRA finds opportunity within the Health Care sector,” said CFRA's Director of ETF & Mutual Fund Research Todd Rosenbluth in the note. “Trading at 15.7x on a forward P/E basis, it is below its historical average of 17.0x. In the first quarter of 2019, 75% of companies in the health care sector beat both sales and earnings estimates, for the best performance in the S&P 500 index.”

CFRA notes health care, the second-largest sector weight in the S&P 500, often outperforms the broader market in the seasonally weak May through October period.

Why It's Important

The research firm has an Overweight rating on XLV, which allocates over 48 percent of its weight to the pharmaceuticals and biotechnology industries.

“Biotech and pharmaceutical companies account for 48% of the market capitalization of the sector and CFRA thinks the drug pipeline, approval time reductions, and merger-and-acquisition activity make these industries very attractive,” said Rosenbluth.

CFRA also has an Overweight rating on the Vanguard Consumer Staples ETF (VDC), which has been trading better than the broader market this month. VDC is a large-cap, cap-weighted consumer staples ETF with significant exposure to familiar names, such as Procter & Gamble (PG), Coca-Cola Co. (KO) and Walmart Inc. (WMT).

What's Next

“CFRA is also raising the S&P 500 Consumer Staples sector to Marketweight from Underweight,” said Rosenbluth. “While several staples companies have announced plans to reduce or eliminate dividends, the sector’s dividend yield remains near 3.0%. As the seasonally slow summer begins and trade uncertainty weighs on investors, the sector could see in-line performance.”

VDC's dividend yield is 2.62 percent.