Best defensive ETFs for plunging markets

  • By Georgina Tzanetos,
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Concerns for the global economy and investors coming to terms with the Federal Reserve’s tightening of monetary policy have roiled financial markets in recent weeks. The S&P 500 () has suffered five consecutive weekly declines, marking the longest run of losses since June 2011.

Markets have been rattled by ongoing concerns surrounding the Russia-Ukraine conflict and the largest Fed interest rate hike since 2000. Moreover, inflation is currently around 40-year highs. The combination of geopolitical conflict, rising interest rates and unrelenting price pressures have provided the perfect storm for tumultuous trading.

If you haven’t done so already, it’s probably a good time to make sure your investments are well-positioned to defend your portfolio against prolonged periods of market volatility.

One way is to consider some of these low-expense ETFs that are invested in areas that tend to do well when markets turn bearish. Below are some top defensive funds to take a look at. (Data is as of May 11, 2022.)

iShares Edge MSCI Min Vol USA ETF

This popular fund () has over $26 billion in assets and is one way to stay invested in equities while minimizing risky exposure. The way the fund achieves this is by taking a look at the top stocks with the lowest volatility, then narrowing the selection further through their own ranking system and expected future volatility to decide whether or not it will be included in the fund.

The fund mimics the MSCI USA Minimum Volatility Index, whose goal is to create the least-volatile basket of stocks from large- and mid-cap stocks. According to Morningstar, the fund has experienced 25 percent less volatility than its parent index since its inception in 2011.

5-year returns (annualized): 10 percent

Dividend yield: 1.39 percent

Expense ratio: 0.15 percent

Fidelity MSCI Utilities ETF

Sectors like utilities and water tend to hold strong during times of market downturn, as their demand is a part of everyday life, regardless of market movements. Utility stocks are generally considered to be a good defensive move against bear markets/ market downturns.

Two of the fund’s () largest holdings — NextEra Energy () and Duke Energy () — provide electricity to millions of Americans along the country’s Southeast coast.

5-year returns (annualized): 9.88 percent

Dividend yield: 2.73 percent

Expense ratio: 0.08 percent

Invesco S&P 500 High Div Low Vol ETF

With one of the highest yields on this list, the Invesco high dividend/low volatility ETF () delivers just that — payoff without the risk. The majority of the fund’s holdings are in defensive and consumer-based sectors, utilities, consumer defensive and healthcare.

All three sectors are well-poised for dividend growth, even during a market downturn. Utilities are a constant need regardless of market conditions, as is healthcare, and consumer defensive stocks that produce everyday mainstays like personal goods and foods all position a portfolio well in the event of market volatility. Some of its largest portfolio holdings include Kinder Morgan () and The Kraft Heinz Co ().

5-year returns (annualized): 7.53 percent

Dividend yield: 3.38 percent

Expense ratio: 0.3 percent

Vanguard Consumer Staples ETF

Similar to the Fidelity MSCI Utilities ETF, this Vanguard fund () has a strong focus on sectors that can defend a portfolio against market volatility. VDC in particular, though, is more focused on consumer goods rather than utilities.

The fund’s three largest holdings are in Procter & Gamble (), Coca Cola (), and Costco Wholesale Corp. ().

5-year returns (annualized): 9.27 percent

Dividend yield: 2.03 percent

Expense ratio: 0.1 percent

Utilities Select Sector SPDR ETF

Another fund focused on utilities, this ETF () from State Street Global Advisors holds more than $15 billion in assets, making it the largest utilities-tracking ETF on the equity market. Like the Fidelity fund on this list, the company is focused on energy companies that supply things like electricity and gas to millions of Americans across the country. These funds are stable mainstays during times of market volatility.

5-year returns (annualized): 10.26 percent

Dividend yield: 2.82 percent

Expense ratio: 0.1 percent

iShares 1-3 Year Treasury Bond ETF

This bond fund () does not give much in the way of yield, but offers considerable stability with a variety of short-term U.S. Treasurys. The two biggest holdings are Treasury notes that mature next year, and the rest toggle between 2023-2025.

The short maturities decrease the risk of runaway interest rates clamping down on the fund’s price. The fund is designed to hedge market downturns and could have a place in a diversified portfolio positioned for volatility.

5-year returns (annualized): 0.86 percent

Dividend yield: 0.25 percent

Expense ratio: 0.15 percent

Bottom line

There are a variety of investments that savvy investors can still tap into during market downturns. The end-all answer does not have to be simply to sell during difficult times. Rather, you can turn to low-expense 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 several simultaneous stressors on the global economy.

More adventurous investors can also choose to invest in these sectors on their own, through individual stocks. It’s important to reassess your portfolio ahead of anticipated volatility, and consider incorporating some defensive investments as needed.

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