Though U.S. stocks have made an attempt to move higher on news of a big nationwide stimulus effort, the fact remains that most investors are significantly in the red in 2020. And as the coronavirus epidemic rages around the globe, the sad reality is that it remains far too early to simply call this bear market over. Now that some of the dust has settled, many investors are trying to decide how to reposition themselves for the rest of the year. If you're interested in taking a more defensive approach to your portfolio, then consider these nine exchange-traded funds.
iShares 1-3 Year Treasury Bond ETF
While many things are uncertain in life, the staying power of the U.S. government is one of the few things investors rely on. After all, if Uncle Sam can't pay his bills and America defaults on its debt, the world has much bigger problems than coronavirus. This short-term Treasury bond ETF (SHY) is super low-risk because it relies on debt that comes due in the next few years. Admittedly, the 2% yield isn't much, but the stability in this fund is unrivaled.
SPDR Gold Trust
Another go-to investment for risk-averse investors is gold. To be clear, gold is not a sure thing and is very much subject to price volatility. Consider that gold hit an all-time high of roughly $1,900 an ounce in 2011 and then plunged back down to $1,000 in late 2015 before surging back up to current levels around $1,600. That's hardly a risk-free trade. However, what gold does offer is a lack of correlation to the broader stock market – meaning it moves independently. GLD (GLD) is the most liquid way to invest directly in gold via an ETF, with $50 billion in assets and volume that currently tops 50 million shares daily.
Utilities Select Sector SPDR Fund
If you want to stick with stocks but just reduce your risk of losses in a downturn, slow-and-steady utility stocks are a decent choice. Folks will keep paying their electric and gas bills even when cutting back on other expenses, and the highly regulated nature of the sector means it's highly unlikely you will see any surprises via competition. XLU (XLU) is the largest utility fund with nearly $10 billion in assets at present and top holdings that include NextEra Energy (NEE) and Dominion Energy (D).
Vanguard Consumer Staples ETF
Another very stable sector to consider is consumer staples. The companies behind the essential brands in your pantry are pretty recession proof because discretionary expenses like eating out and traveling are the first things for consumers to cut. And in the current environment with Americans stuck at home thanks to coronavirus, staples have stood out with picks like Clorox Co. (CLX) and Hormel Foods Corp. (HRL) holding strong in 2020 despite trouble for other companies. This Vanguard fund (VDC) gives you wide exposure to 93 staples stocks like these.
iShares Edge MSCI Min Vol USA ETF
Getting more sophisticated, this oddly named iShares fund (USMV) can be decoded as a vehicle benchmarked to an MSCI index of minimum volatility stocks that are located in the U.S. That means it biases your investment toward stocks in companies with a comparatively lower risk profile and lower volatility readings based on a proprietary screening methodology. For instance, right now USMV has telecommunication stocks like Verizon Communications (VZ) and staples stock PepsiCo (PEP) among its top holdings.
Legg Mason Low Volatility High Dividend ETF
Adding another layer to screening for low volatility stocks is this Legg Mason fund (LVHD) that also requires components to offer a generous dividend. Right now, that adds up to roughly 3.7% in yield from this ETF thanks to stocks like cereal giant General Mills (GIS) and pharmaceutical stocks like Merck & Co. (MRK). Dividends are not just a nice flow of a cash, but also an indicator of financial health as companies pass on profits to shareholders. This ETF's focus on payouts as well as low volatility profiles results in holdings that are more stable than your average stock on Wall Street.
Invesco S&P SmallCap Low Volatility ETF
Some investors aren't interested in running for the hills completely, however. In that case, this unique fund from Invesco (XSLV) offers traders a way to reduce their risks but still play the more aggressive small-cap stocks that theoretically have more long-term potential. In a nutshell, XSLV takes a similar screening methodology to the prior funds but applies it to the universe of smaller stocks. That results in a portfolio of 120 picks like household products firm WD-40 Co. (WDFC) and financial stock Westamerica Bancorp (WABC).
Vanguard Megacap ETF
Going the completely opposite direction is to simply rely on the biggest names on Wall Street via this Vanguard fund (MGC). You get exposure to the 250 biggest names on the planet, which have a median market cap of $150 billion. Of course, that means you're reliant on tech giants like Microsoft Corp. (MSFT) and Apple (AAPL) that were conspicuously lacking from other funds on this list. But some investors believe these stocks will weather any market downturn based on sheer size alone, and MGC gives you a simple way to play these mega-caps in one position.
ProShares Short S&P 500 ETF
If you're really terrified about a stock market downturn, then consider (SH) as a kind of portfolio insurance policy. That's because this ProShares fund uses derivatives like futures and swaps to bet that the S&P 500 will decline – meaning you profit if the stock market drops. Obviously, it's dangerous to bet against Wall Street in the long run, as stocks have a consistent record of trending up over the years. But if you want some short-term defense, SH may be worth a look as a hedge.
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