Though the S&P 500 (.SPX) grinds higher, some worry that 2019 looks a lot like the "irrational exuberance" cited by Alan Greenspan during the dot-come heyday of the 1990s. There’s been trouble on the IPO front, with the We Company failing to enter public markets out of low valuation fears. Aggressive buyout offers have been made, including a plan worth more than $70 billion to take Walgreens Boots Alliance (WBA) private. And, investors have pushed the S&P to record highs. There are good reasons to stay in stocks, and plenty of economic data points indicate U.S. stocks may keep moving higher in the near term. But if you fear the other shoe may drop soon, here are seven exchange-traded funds to buy for protection in an uncertain market.
SPDR Gold Shares
Gold is the go-to investment for investors looking for an uncorrelated asset to the stock market. And with some $42 billion in assets under management, (GLD) is the go-to exchange-traded product for individual investors looking to hold gold. GLD's assets are 100% in physical bullion, offering you the safety and security of this precious metal without the hassle of buying and selling individual bars or coins. Some purists think the best way to truly hedge against market uncertainty is to hold physical gold bullion, but that comes with its own complications, including storage and insurance. This ETF is a much simpler alternative for investors looking for a hard asset as a hedge.
iShares Core U.S. Aggregate Bond ETF
Another important asset class to consider if you want to reduce your risk profile are bonds. But what kind of bonds? These debt instruments come in all shapes and sizes, including corporate bonds, sovereign debt and junk bonds that yield big interest rates as a hedge against the loan to more risky borrowers. Rather than try and navigate this complicated space on your own, this iShares fund (AGG) offers an effective one-stop shop for the entirety of the bond market. With more than $65 billion in assets and a yield of about 2.7%, this is one of the most popular instruments to invest broadly in the bond market as an alternative or a supplement to stocks in your portfolio.
iShares Edge MSCI Min Vol USA ETF
If you still want to be largely invested in stocks but are interested in reducing your risk profile in an uncertain market, this iShares fund (USMV) is a good option. It's the largest dedicated low-volatility equity fund out there, with more than $36 billion in assets. Made up of more than 200 of the largest U.S. stocks including telecom giant Verizon Communications (VZ) and Coca-Cola Co. (KO), this fund is biased toward blue chips that have historically declined less than the market at large during downturns.
Invesco S&P MidCap Low Volatility ETF
Taking a similar approach, this low-volatility fund from Invesco allows for a slightly "growthier" approach, with a focus on mid-sized corporations instead of large-cap stocks. While it's true that larger corporations sometimes offer more stability given rich histories and deep pockets, that's not always the case – as the 2008 financial crisis demonstrated. The mid-cap stocks in (XMLV) are smaller names you may not have heard of, like commercial real estate firm Liberty Property Trust (LPT) and regional utility OGE Energy Corp. (OGE). However, these are selected thanks to a lower risk profile than their peers, meaning you can protect yourself without giving up growth potential.
Vanguard Megacap ETF
If you instead want to focus solely on the big players, Vanguard offers a mega-cap fund (MGC) with the biggest stocks in the U.S. After all, a company like Apple (AAPL) with almost $300 billion in the bank is highly unlikely to go belly up, even if there are short-term changes in its fortunes. With about 260 holdings, this fund takes roughly the top half of the S&P 500 stocks and boasts a median market cap of around $130 billion. Be aware, however, that these larger stocks tend to be more in the financial or technology sectors, representing a little more than 41% of the portfolio.
Legg Mason Low-Volatility High-Dividend ETF
Another way to invest in stocks with a lower risk profile is to focus on income-oriented dividend stocks. Generally speaking, a stock that pays a consistent dividend is a safer bet than one that does not because it has tangible evidence of profits. This Legg Mason fund (LVHD) zeroes in on stocks with generous paydays but also deploys a screening methodology similar to low-volatility funds, creating a portfolio of picks that should hang tough in a downturn but still offer some form of payback. Top holdings right now include stocks like utility Duke Energy Corp. (DUK) and consumer staples giant General Mills (GIS), supporting a yield of about 2.6%.
Cambria Tail Risk ETF
Though perhaps the most sophisticated fund on this list, Cambria's ETF (TAIL) is perhaps the purest form of portfolio insurance that exists for individual investors. By putting some of its money in rock-solid U.S Treasury bonds and the rest in relatively cheap instruments that go up big-time when the market goes down, the funds is designed to slowly decline in good times and pay back big time in the event of a downturn. TAIL regularly purchases out-of-the-money options on the stock market, with price targets that are far enough away from the normal range of volatility. If they come into play, these investments will pay off at a time you may really need it.
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