7 best bear market index funds to buy now

These are your best options for investing in index funds during a bear market.

  • By Rebecca Lake,
  • U.S. News & World Report
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Even bear markets can present buying opportunities, but how you invest hinges on your preferred strategy. Index investing may appeal to you if you're looking for a passive way to capitalize on the bearish stock movements. Rather than buying individual stocks, you invest in an index fund that owns all of the stocks in a benchmark index, such as the S&P 500 (.SPX) or the Nasdaq (.IXIC). "The best thing about index investing is that it is simple," says David Reyes, financial advisor and chief financial architect at Reyes Financial Architecture in San Diego. "Most investors are not comfortable managing stocks, so this is a great way to get exposure to the stock market without having to be a stock expert." When investing in index funds during a bear market, it's important to choose wisely. That being said, here are seven of the best bear market index funds to buy now.

Consumer Staples Select Sector SPDR Fund

When a bear market precedes a recession, consumer staples can be a solid defensive sector for investors. XLP (XLP) tracks the Consumer Staples Select Sector Index (.IXR), which includes securities spanning food and beverages, tobacco and personal products. Its top 10 holdings include Procter & Gamble Co. (PG), Coca-Cola Co. (KO) and Walmart (WMT). Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan, says XLP and similar funds hold companies that have already shown resilience in the current bear market and are positioned to continue to do so. The fund has a 10-year average return of 9.86% and a 2.95% yield. With an expense ratio of 0.13%, it's a cost-efficient buy for investors seeking bear market index funds.

iShares Nasdaq Biotechnology ETF

Similar to XLP, Milan says, the iShares Nasdaq Biotechnology ETF (IBB) is another solid index fund option if you want exposure to companies that can hold their own in a bear market. This fund tracks the Nasdaq Biotechnology Index (.NBI), which holds a variety of biotech firms, including Gilead Sciences (GILD), Vertex Pharmaceuticals (VRTX) and Amgen (AMGN). IBB delivered a 10-year average annual return of 13.77%, surpassing the performance of its benchmark index, which returned 12.26% over the same period. With the current bear market seeing a surge in investor interest in biotech and health care stocks, IBB could be poised to make up some of the losses brought on by volatility in the first quarter.

Vanguard S&P 500 ETF

Vanguard's founder invented the index fund, and VOO (VOO) is one of several index ETFs you might consider a go-to choice for a bear market. VOO tracks the performance of the S&P 500, which includes the 500 largest public companies in the U.S. This fund could be an excellent low-cost pick if you want to own top players such as Microsoft Corp. (MSFT), Amazon.com (AMZN) and Facebook (FB) in a single package. The current bear market has returns for the Vanguard S&P 500 ETF in the negative, but the fund posted a five-year average annual return of 6.70%. Its current dividend yield is 2.24%, meaning shareholders get the benefit of passive income while waiting out a bear market. The expense ratio is just 0.03%.

Vanguard Information Technology Index ETF

Information technology may prove to be one of the hottest sectors for the current bear market as more people shift to working remotely and businesses seek online-security solutions. VGT attempts to match the performance of the MSCI US Investable Market Information Technology 25/50 Index, which is made up of small-, mid- and large-cap companies from the IT sector. For example, some of the top holdings include Apple (AAPL), Intel Corp. (INTC) and Nvidia Corp. (NVDA). The Vanguard Information Technology Index ETF (VGT) posted a 10-year average annual return of 15.50%, nearly double the return of its underlying benchmark. Its current yield is 1.40%, but like other Vanguard index funds, it comes with a low expense ratio – 0.10%.

ProShares S&P 500 Dividend Aristocrats ETF

Dividend aristocrats are companies that have consistently increased their dividend payout for 25 years or longer. These are established companies with business models that allow them to navigate downturns and come out on the other side intact. If you're looking for stable dividend income during a bear market, when companies are cutting dividends, NOBL (NOBL) could be a good buy. This exchange-traded fund tracks the S&P 500 Dividend Aristocrats Index, which includes Clorox Co. (CLX), Walmart and Johnson & Johnson (JNJ), among others. Its current dividend yield is 2.66%, and the expense ratio is 0.35%. Since its inception in 2013, NOBL has posted a double-digit annual return each year, excluding 2015 and 2018.

Fidelity 500 Index Fund

If you're looking for an alternative to low-cost Vanguard funds, the Fidelity 500 Index Fund (FXAIX) is another index fund option that tracks the S&P 500. Investors enjoy streamlined exposure to market giants such as Alphabet (GOOG) and JPMorgan Chase & Co. (JPM) in a single low-cost fund. "FXAIX (FXAIX) is great, as it has a competitive nature and creates higher-quality funding for investors," says Ethan Taub, CEO and founder of Goalry. The fund has a 10-year average annual return of 10.51%, with only one down year since its inception in 2011. It's also one of the cheapest index funds you can buy to invest in a bear market, with a net expense ratio of 0.01%.

Utilities Select Sector SPDR Fund

Like consumer staples, utilities can also be a good defensive choice for owning index funds during a bear market since utility service is a basic need. XLU seeks to match the performance of the Utilities Select Sector Index (.IXU), which includes a number of top energy providers such as NextEra Energy (NEE), Dominion Energy (D) and Duke Energy Corp. (DUK). In addition to electric utility providers, XLU also invests in water utilities and gas utility services. Of all the bear market index funds included in this list, the Utilities Select Sector SPDR Fund (XLU) has one of the best yields, at 3.52%. This fund is another bargain-buy option, with an expense ratio of 0.13%.

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