State Street SPDR ETFs: Defensive factor strategies tame the US equities bear
2025 has been a year of strong relative performance in US equities from defensive factor exposures such as quality, dividends, and low volatility.
In Q2 2025, investors are likely to continue to seek shelter from the fallout of President Trump’s tariffs and trade policies. To help manage volatility, investors may want to consider defensive stock exposures, especially within US equity allocations. Two non-market-cap approaches — dividends and low volatility — could help investors de-risk their portfolios. Both exposures significantly outperformed the market in Q1 and, historically, have provided strong relative performance in market downturns.
A dividend aristocrats approach focuses on selecting companies with long-term track records of paying regular cash dividends. Our quality aristocrats strategy uses a systematic approach to identify high quality companies that have a long-term track record of efficiently converting revenue into free cash flow.
In the past five years, since the global pandemic in Q1 2020, the S&P 500 has experienced eight drawdowns greater than 5% in a calendar month (Figure 1). During the pandemic drawdowns, the technology sector was viewed as providing idiosyncratic protection — this was an anomaly. Usually, defensive sectors like Utilities and Consumer Staples tend to provide downside protection. But in later drawdowns, investors would have benefitted from owning lower beta exposures such as dividend aristocrats or low volatility.
Ryan Reardon, Senior Equity ETF Strategist: 'We expect the trade war will remain in focus this quarter and investors will continue to battle the uncertainty headwind. US equities may struggle to return to market leadership until the focus of domestic policy shifts from global trade to the domestic agenda (e.g., tax cuts and deregulation). If the market continues to recover following the Liberation Day selloff, investors may benefit again from holding Quality exposures. For investors concerned about the potential for more volatility, Dividend Aristocrats or low volatility exposures could help de-risk portfolios.'
