Markets continue to be shaken by excessively high inflation, the Federal Reserve’s aggressive tightening of monetary policy and lingering concerns surrounding the Russian-Ukrainian conflict. The combination of relentless price pressures, rapidly rising interest rates and geopolitical strife provided the perfect storm for tumultuous transactions.
Worries about the global economy and the prospect of an impending recession have rattled financial markets in recent months.
That’s why it’s so important to make sure your investments are well positioned to defend against prolonged periods of market volatility.
The best defensive ETFs for portfolio protection
One way to do this is to consider some of those popular low-cost ETFs that are invested in areas that tend to do well when markets turn bearish. Below are some of the best defensive funds to review. (Data is as of June 14, 2022.)
iShares Edge MSCI Min Vol USA ETF (USMV)
This popular fund has over $24 billion in assets and is a way to stay invested in stocks while minimizing risk exposure. The fund does this by looking at the top stocks with the lowest volatility, then further narrowing the selection using their own ranking system and expected future volatility to decide whether or not they will be included in the fund.
The fund mimics the MSCI USA Minimum Volatility Index, which aims to create the least volatile basket of stocks from large and mid-cap stocks. According to Morningstar, the fund has experienced 25% less volatility than its parent index since its inception in 2011.
5-year returns (annualized): 8.59 percent
Dividend yield: 1.39 percent
Spending rate: 0.15 percent
Fidelity MSCI Utilities ETF (FUTY)
Sectors such as utilities and water tend to remain strong during market downturns because their demand is part of everyday life, regardless of market movements. Utilities stocks are generally considered a good defensive against bear markets/market downturns.
Two of the fund’s largest holdings – NextEra Energy (NEE) and Duke Energy (DUK) – provide electricity to millions of Americans along the country’s southeast coast.
5-year returns (annualized): 8 percent
Dividend yield: 2.61 percent
Spending rate: 0.08 percent
High Divide, Low Vol Invesco S&P 500 ETF. (SPHD)
With one of the highest yields on this list, the Invesco High Dividend/Low Volatility ETF offers exactly that – risk-free gain. The majority of the fund’s holdings are in the defensive and consumer-oriented sectors, utilities, consumer defensive and healthcare.
All three sectors are well positioned for dividend growth, even during market downturns. Utilities are a constant need regardless of market conditions, as is healthcare, and defensive consumer stocks that produce everyday staples like personal goods and food all position a portfolio for volatility. of the market. Some of its largest portfolio holdings include Kinder Morgan (KMI) and The Kraft Heinz Co (KHC).
5-year returns (annualized): 5.71 percent
Dividend yield: 3.36 percent
Spending rate: 0.3%
Vanguard Consumer Staples ETF (VDC)
Similar to the Fidelity MSCI Utilities ETF, this Vanguard fund places a heavy emphasis on sectors that can defend a portfolio against market volatility. VDC in particular, however, focuses more on consumer goods than utilities.
The fund’s three largest holdings are in Procter & Gamble (PG), Coca Cola (KO) and PepsiCo (PEP).
5-year returns (annualized): 7.05 percent
Dividend yield: 2.12 percent
Spending rate: 0.1 percent
Utilities Select Sector SPDR ETF (XLU)
Another utility-focused fund, this ETF from State Street Global Advisors holds over $15 billion in assets, making it the largest utility-tracking ETF in the equity market. Like the Fidelity fund on this list, the company focuses on energy companies that provide things like electricity and gas to millions of Americans across the country. These funds are stable pillars in times of market volatility.
5-year returns (annualized): 8.32 percent
Dividend yield: 2.7 percent
Spending rate: 0.1 percent
iShares 1-3 Year Treasury Bond ETF (SHY)
This bond fund does not give much yield, but offers considerable stability with a variety of short-term US Treasuries. The two largest holdings are Treasury bills that mature next year, and the rest swing between 2023 and 2025.
Short maturities reduce the risk of runaway interest rates weighing on the price of the fund. The fund is designed to hedge market declines and could fit into a diversified portfolio positioned for volatility.
5-year returns (annualized): 0.62 percent
Dividend yield: 0.28 percent
Spending rate: 0.15 percent
At the end of the line
There are a variety of investments that sophisticated investors can always tap into during periods of market downturns. The ultimate answer shouldn’t simply be to sell during tough times. Instead, you can turn to low-cost ETFs positioned in defensive stocks and consumer goods whose services are essential to everyday life. These ETFs can position an investor well in the face of multiple simultaneous stressors on the global economy.
More adventurous investors can also choose to invest alone in these sectors, via individual stocks. It is important to reassess your portfolio ahead of anticipated volatility and consider incorporating defensive investments as needed.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making an investment decision. Further, investors are cautioned that past performance of investment products does not guarantee future price appreciation.