Volatility in the stock markets can crop up at any time, causing portfolio losses when you least expect it. Inflation remains higher than the Federal Reserve’s target and high interest rates could lead to an economic slowdown at some point.
Defensive ETFs can help limit risk in your portfolio so that you don’t lose as much if the market sells off. Here are some of the best defensive ETFs to consider for your portfolio.
Top Defensive ETFs for Portfolio Protection
One way to protect your portfolio is to consider some of these popular, low-cost ETFs invested in areas that tend to do well when markets turn bearish. Below are some of the best defensive funds to look at. (Data is as of April 15, 2024.)
iShares Edge MSCI Min Vol US ETF (USMV)
This popular fund has over $23 billion in assets and is a way to stay invested in stocks while minimizing risky exposure. The way the fund achieves this is by looking at the top stocks with the lowest volatility and then further narrowing the selection through their own ranking system and expected future volatility to decide whether or not to include them 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.
- 5-year return (annualized): 8.18 percent
- Dividend yield: 1.72 percent
- Cost ratio: 0.15 percent
Fidelity MSCI Utilities ETF (FUTY)
Sectors like utilities and water tend to remain strong during market downturns because their demand is part of everyday life regardless of market movements. Utility stocks are generally considered a good defensive move against bear markets and 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 southeastern coast.
- 5-year return (annualized): 4.8 percent
- Dividend yield: 3.25 percent
- Cost ratio: 0.084 percent
Invesco S&P 500 High Div Low Vol ETF (SPHD)
With one of the highest yields on this list, the Invesco high dividend/low volatility ETF delivers just that: payout without the risk. The majority of the fund’s investments are in defensive and consumer sectors, utilities, consumer defensive sectors 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 defensive consumer stocks that produce staples such as personal goods and food products position a portfolio well in case of market volatility. The largest portfolio holdings include AT&T (T) and Verizon (VZ).
- 5-year return (annualized): 4.15 percent
- Dividend yield: 4.56 percent
- Cost ratio: 0.3 percent
Vanguard Consumer Staples ETF (VDC)
Like the Fidelity MSCI Utilities ETF, this Vanguard fund has a strong focus on sectors that can defend a portfolio against market volatility. However, VDC in particular is more focused on consumer goods than utilities.
The fund’s three largest holdings are in Procter & Gamble (PG), Costco Wholesale (COST) and Walmart (WMT).
- 5-year return (annualized): 8.83 percent
- Dividend yield: 2.29 percent
- Cost ratio: 0.1 percent
Utilities Select Sector SPDR ETF (XLU)
Another fund focused on utilities, this ETF from State Street Global Advisors, holds more than $11 billion in assets, making it the largest utility tracking ETF in the stock 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 mainstays in times of market volatility.
- 5-year return (annualized): 5.29 percent
- Dividend yield: 3.4 percent
- Cost ratio: 0.09 percent
iShares 1-3 year government bond ETF (SHY)
This bond fund offers decent returns and significant stability by holding a variety of short-term U.S. government bonds.
The short maturities reduce the risk of runaway interest rates putting pressure 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 return (annualized): 0.96 percent
- Dividend yield: 4.68 percent
- Cost ratio: 0.15 percent
In short
There are several investments that smart investors can still take advantage of during a market downturn. The final answer doesn’t have to be simply: sell in 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 light of several simultaneous stressors on the global economy.
More adventurous investors can also choose to invest in these sectors themselves, through individual stocks. It is important to reassess your portfolio in anticipation of expected volatility and consider including some defensive investments if necessary.
Former Bankrate reporter Georgina Tzanetos contributed a version of this story.
Editorial Disclaimer: All investors are advised to conduct their own independent research into investment strategies before making any investment decision. In addition, investors are advised that the past performance of investment products does not guarantee future price increases.
