Worries build about the bull’s strength.
With the bull market well into its ninth year and the impact of 2017’s tax cuts mostly absorbed, some investors are getting a little nervous. There are concerns the summer’s low trading volume could set Wall Street up for a tumble. Pessimism isn’t uncommon — especially for this much-maligned and untrusted rally since the 2009 lows. However, cracks in confidence are appearing. Notably, six in 10 economists surveyed for a recent Wall Street Journal report predicted the economic expansion will end in 2020. Here are seven low-risk exchange-traded funds to consider if you worry about a decline in the not-so-distant future.
Schwab Short-Term U.S. Treasury ETF (ticker: SCHO)
Bonds are fundamentally less volatile than stocks. And among bonds, those with shorter duration or government backing are the most stable of all. That makes this Schwab fund one of the most solid investments out there, with investments solely in U.S. Treasury bonds that are of three years or shorter to maturity. Of course, the certainty of these investments doesn’t provide much in the way of yield; currently, SCHO offers just shy of 2.5 percent annually. But this fund will assuredly hang tough regardless of what happens to the broader stock market.
Vanguard Short-Term Corporate Bond ETF (VCSH)
The VCSH moves away from the bedrock bets in U.S. Treasury bonds to take on a bit more risk in the private sector in pursuit of more yield. Don’t think this means this Vanguard fund is making aggressive bets, however. Top holdings include bonds from megabank JP Morgan Chase & Co. (JPM) and pharmacy and benefits giant CVS Health Corp. (CVS), two companies that are clearly going nowhere any time soon. Corporate bonds do offer a bit more yield, giving this fund a 3.3 percent annualized payout. But the kind of bonds taken on by VCSH are almost as solid as government bonds.
SPDR Bloomberg Barclays TIPS ETF (IPE)
A challenge with short-term bonds is inflation could erase their modest yield. With crude oil hitting its highest prices since 2014 and as wage inflation starts to heat up, inflation is a noteworthy issue. That’s where U.S. Treasury inflation protected securities, or TIPS, come in. The bonds are tied to the consumer price index, a common benchmark of inflation, and when the TIPS mature, investors are paid an adjusted principal that reflects the impact of inflation. If inflation doesn’t pose a problem, however, returns will be quite muted. But as a defensive investment, TIPS serve an important role.
iShares Preferred Stock ETF (PFF)
Preferred stock is a hybrid of common stocks that trade as part of an index like the S&P 500 and corporate bonds. It is riskier than bonds because preferred stock doesn’t get the same treatment as corporate obligations, but they are much more stable than traditional equities. PFF allows investors to take a share in the special class of stock that’s offered from big-time corporations like Citigroup (C). The downside is there isn’t the rapid appreciation possible for investors in common stock, but the high dividends and stable share prices in the preferreds held by PFF are a big plus.
Powershares Defensive Equity ETF (DEF)
What if you want to invest in common stock, but want to weed out some of the more risky names? This Powershares fund does that, with a bias toward defensive sectors. Health care is the top focus at 19 percent of the portfolio. Also important is DEF’s equal-weight approach, ensuring no single position grows to become too much of the portfolio. Through regular rebalancing, the ETF seeks a 1 percent share for each of its 100 holdings for smoother long-term returns. Holdings that show the defensive nature of this ETF include global payments processor Visa (V) and health care giant Baxter International (BAX).
PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF (SPHD)
High-yield stocks are in demand among risk-averse investors because they offer the notion of a payday regardless of market volatility. However, investors must remember that dividend yield is simply a calculation: Divide the annual payout by the current stock price. So while one way to get a high yield is to see the numerator (dividends) rise, an equally effective way is to see the denominators (share price) drop. SPHD seeks big dividend payouts but insists on low-volatility and long-term stability in share price, too. This fund offers 4.1 percent yield as a result, and a share price that is more stable than other high-yield offerings.
iShares Edge MSCI Min Vol EAFE ETF (EFAV)
While the formal name of this ETF is an alphabet soup, the context around all those abbreviations and acronyms is that this iShares fund offers minimum volatility stock investments across the EAFE region — Europe, Australia and the Far East. That mission becomes clear when you see holdings that include Japan’s Nippon Telegraph and Telephone, a legacy telecom such as AT&T (T), and U.K. foodservice giant Compass Group. These are stable stocks with an international flavor. That means in addition to stability, your portfolio can also enjoy some nice geographic diversification to reduce risk.
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