Exchange-traded funds that offer protection.
Think it’s silly to think about portfolio defense when the market is at all-time highs? Well, talk to investors who were fully long in mid-2000 and late 2007 and ask them if they had any regrets. Don’t get caught flat-footed; the following exchange-traded funds will help you play a little defense in the event the market gets rocky.
Vanguard Short-Term Bond ETF (ticker: BSV)
The Vanguard Short-Term Bond ETF is one of the safest funds you can park your money in just about any kind of environment. BSV invests in Treasurys, investment-grade and other high-quality bonds with short maturities between one and five years, making it resilient against interest-rate hikes. The fund is extremely stable, trading in a tight range between about $82 and $79.25 since 2010. And don’t let a potential June rate hike scare you off — BSV is up fractionally since the Fed first raised rates Dec. 14. You won’t make much, at just a 1.4 percent yield; BSV is merely a place to park your cash.
Expenses: 0.07 percent, or $7 annually per $10,000 invested
iShares 20+ Year Treasury Bond ETF (TLT)
The TLT, which invests in U.S. Treasurys with maturities of more than 20 years, carries more interest-rate risk than BSV. After all, its average duration of more than 17 years is far higher than BSV’s average of three years. However, TLT also is about 5 percent higher since mid-December despite two interest-rate hikes and Wall Street’s confidence in a June rate hike. Meanwhile, should markets start to quake this summer, investors going risk-off will be looking to pile into TLT for its more substantial 2.8 percent SEC yield — which means anyone already in the fund could enjoy a double whammy of capital gains and income.
Expenses: 0.15 percent
Guggenheim Defensive Equity ETF (DEF)
If you prefer to stay mostly invested in equities, you can opt for Guggenheim’s subtly named Defensive Equity ETF, which is literally focused on investing in sectors and individual stocks that perform well when the market slides. DEF’s holdings are selected by three factors: “beta, downmarket volatility and required revenue growth probability scores.” That results in a fairly balanced fund that’s heaviest in consumer discretionary stocks like McDonald’s Corp. (MCD), financials such as Aon PLC (AON) and tech stocks including Alphabet (GOOG, GOOGL). Completing this fund’s protective nature is an equal-weighting methodology that keeps all 100 holdings at roughly 1 percent of the fund’s assets.
Expenses: 0.6 percent (includes 1-basis-point fee waiver)
Fidelity MSCI Health Care Index (FHLC)
Every investor knows by memory the defensive sectors you’re supposed to pile into when the going gets tough: utilities, health care and consumer staples. But in a risk-off environment, value will matter, too — and health care wins that battle decisively with a mere 15.5 forward price-earnings ratio compared to 20.1 for consumer staples and 17.6 for utilities. Fidelity’s FHLC is an inexpensive way to invest in the space, providing access to standard health care fare such as pharma, biotech, equipment and care providers. Top holdings include stalwarts such as Johnson & Johnson (JNJ), Pfizer (PFE) and UnitedHealth Group (UNH).
Expenses: 0.084 percent
PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD)
While you might want to get defensive, there’s always the possibility that the bull market keeps slowly trudging higher through the summer months, continuing to defy gravity. PowerShares’ SPHD is the perfect fund, then, for those who want to protect against downside but still be able to capture upside. For instance, since the start of 2016, the Standard & Poor’s 500 index has advanced more than 17 percent, but the SPHD has climbed nearly 20 percent in that time. This ETF is heavy in utilities (22.5 percent), real estate (18.5 percent) and consumer staples (11 percent), and a 12-month distribution rate of 3.9 percent.
Expenses: 0.3 percent
PowerShares Preferred Stock ETF (PGX)
If you’re looking for shelter that provides high income, you’d do well to consider preferred stocks — those stock-bond “hybrids” that rarely offer much in the way of capital gains, but can throw off yields between 5 and 7 percent. PowerShares’ PGX is a collection of 252 such preferred shares with a roughly 60-40 mix of investment- and non-investment-grade. Like most preferred-stock funds, PGX is heavily overweighted in financials (75 percent), with notable allocations in utilities and real estate (8 percent) as well. PGX tends to trade in a tight range, so don’t expect much in gains; what you want here is protection, and PGX’s 5.6 percent SEC yield.
Expenses: 0.5 percent
ProShares Short S&P500 ETF (SH)
ProShares’ SH is perhaps the best market hedge for everyday investors. SH provides the inverse of the daily performance of the S&P 500, so if the S&P 500 loses 1 percent, SH should gain 1 percent, minus fees. That tends to “wiggle” a bit over time (the SH is down 30.6 percent over the past three years while the SPY is up 27.48 percent), but it’s still pretty faithful, and it’s not as dangerous as some 3x leveraged fund. If you think the market is in for a short-term fall, don’t sell your long positions — just buy SH and get some upside from the market’s temporary downside.
Expenses: 0.89 percent
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7 ETFs for a Solid Portfolio Defense originally appeared on usnews.com
