- Securities or investments that are perceived as being lower risk by virtue of their lower exposure to economic cycles. While the term is generally used in connection with stocks that possess defensive characteristics, such as stable cash flows and lower volatility, it may also be used to refer to lower-risk securities such as government bonds and preferred shares. Defensive stocks may outperform their flashier counterparts like growth stocks during periods of economic uncertainty when equity markets display a declining trend, but will underperform during periods of economic expansion.
From an equity perspective, defensive buys are usually found in sectors that are immune to recessions and economic slowdowns. These sectors generally comprise suppliers of essential goods and services - such as pharmaceuticals, utilities and consumer staples - that consumers cannot forgo even during difficult economic times. Savvy investors with diversified portfolios will tend to overweight defensive stocks during slow or no growth periods, and underweight them during expansionary periods.
Investment dictionary. Academic. 2012.
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