Playing defence

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   By Guest Blogger Ryan Lewenza

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So far, many of our market predictions for this year have been playing out. We predicted another year of market gains (Check: TSX and S&P are up, 10% and 7%, respectively), that markets would be volatile (Check: markets fell double digits following Trump’s ‘reciprocal’ tariffs), gold would shine (Check: gold is up 27%) and REITs would do well (Check: REITs have returned 11% so far this year).

Now let’s not get too cocky and ahead of ourselves as we still have a second half left, and Trump tariffs are coming closer to a conclusion. We’ve been stressing in our calls with clients and on this blog that it would be a volatile year, and we expect this volatility to persist in the back half of the year. This is partly why we’ve made some recent changes in our portfolio by adding to some more defensive areas, which I’ll cover today.

VIX index spiked in April following Trump’s tariff announcement

Source: Stockcharts.com, Turner Investments

With the strong equity market performance over the past few years and the uncertainty around global trade, we believe it’s prudent to begin reducing overall portfolio risk. Taking advantage of the recent market strength, we trimmed our exposure in US small-caps, locking in some nice profits, and with the proceeds initiated a more defensive position in US utilities.

Why do we like US utilities?

First, utilities tend to hold up better in tougher markets with their defensive businesses, lower earnings cyclicality and high dividend yields. For example, during Covid utilities fell roughly 20% versus the S&P 500 down 34% and they fell roughly 35% during the financial crisis, when the S&P 500 lost almost 60%. Yes, stable utilities still fall during a big market decline, but they tend to hold up a lot better than the broader markets. The addition of utilities helps to lower overall portfolio volatility.

Second, despite their more defensive characteristics, US utilities have been solid long-term investments. Over the last 50 years US utilities have returned 10% annualized, which is just 0.60 of a percentage point below the more growth-focused Nasdaq Composite. A big reason for the solid returns is their attractive and consistent dividend yields. The US utilities sector is currently yielding 2.8%.

US utilities performance versus the Nasdaq over the last 50 years

Source: Richard Bernstein Advisors

Finally, we see US utilities as a play on Artificial Intelligence (AI). As companies spend billions on building out their AI networks, this will require massive amounts of new energy. A simple ChatGPT query uses 3-10x more than a Google query. And according to Wells Fargo, AI power demand is projected to rise 550% by 2026 (from 2024 levels), before rising another 1,150% by 2030.

We believe US utility companies will benefit from this AI build-out through higher revenues and profits. Indeed, US utilities profits are forecasted to rise by 8-10% annually over the next few years.

Generative AI power demand projections

Source: Wells Fargo

In addition to our recent utilities’ investment, we also trimmed Canadian preferred shares, which have been on fire over the last few years – our main Canadian preferred share ETF has returned 14.2% annualized over the last five years. With the proceeds we added to bonds, which are less volatile (i.e., bonds have a lower standard deviation).

Finally, we’ve increased our cash weight in our portfolio. Collectively, these portfolio changes lock in some profits and help to lower portfolio volatility.

Now to be clear, we maintain our positive outlook on the global equity markets and see the potential for further gains in the second half. But, after a couple of really good years in the markets, it never hurts to ‘ring the register’ on some gains and take a little risk off in portfolios.

Ryan Lewenza, CFA, CMT is a Partner and Portfolio Manager with Turner Investments, and a Senior Investment Advisor, Private Client Group, of Raymond James Ltd.

Source: https://www.greaterfool.ca/2025/07/26/playing-defence/