9 Defensive ETFs for a Volatile Market

Choices for investors tired of the wild ride.

In October, stocks were volatile as the market entered correction territory with a decline of more than 10 percent. And while major indexes were caught in a sharp downtrend, many big-name stocks including IBM (ticker: IBM), General Electric Co. (GE) and Caterpillar (CAT) fared even worse and lost 20 percent or more in the month. But at the beginning of November, the clouds seemed to part with decent corporate earnings and jobs numbers showing the fastest wage growth since 2009. For investors looking to take a bit of risk off the table and get more defensive, here are nine exchange-traded funds to consider.

Vanguard Mega-Cap Value ETF (MGV)

If you want safety, go big with “mega-cap” corporations that take the typical large-cap designation to the next level. This fund has a median market cap of a whopping $180 billion, and includes some of the most recognizable names, from tech stock Microsoft Corp. (MSFT) to big bank JPMorgan Chase & Co. (JPM). And with an expense ratio of just 0.07 percent annually, or $7 on a $10,000 investment, this Vanguard fund keeps with the firm’s philosophy of rock-bottom fees. Just remember that while the individual picks are huge the list is indeed small, with just 150 stocks in total making up this ETF.

iShares Core U.S. Value ETF (IUSV)

For investors who want a deeper bench of holdings in their defensive ETFs, consider this fund tied to the Russell 2500 value index. This benchmark looks at 5,000 U.S. listed stocks, then picks the half of them that exhibit the best value characteristics — that is, stocks that may be underpriced based on operations and assets. Value investing isn’t quite as sexy as chasing fast-growing artificial intelligence stocks or biotech start-ups. However, it is based on current tangible factors and not future potential. This is a crucial part of any defensive portfolio, because this iShares fund is less dependent on a rosy outlook for the market.

Vanguard Total World Stock ETF (VT)

Another twist to broaden your reach beyond familiar S&P 500 names is to take a more global approach. With more than 800 companies, this fund provides a large chunk of the stock market that is diversified across both sectors and geographies. There’s no avoiding U.S. mega-caps like Apple (AAPL), given that America’s New York Stock Exchange and Nasdaq composite are the No. 1 and No. 2 stock markets in the world. However, you’ll also see names like energy giant Royal Dutch Shell (RDS.A), a $280 billion powerhouse. Stocks like this, with a combination of big size and geographic diversification, make VT a good defensive play.

Invesco Defensive Equity ETF (DEF)

With 100 big-sized stocks across all market sectors, on the surface this defensive equity ETF may not seem that different than some of the prior large-cap funds. But the details show a rules-based approach governs the portfolio, with companies that have “superior risk-return profiles during periods of stock market weakness.” While this means this fund may lag in an uptrend, investors can take comfort that stocks in this ETF will fall less than its peers if the market sees trouble. Those components include names such as consumer staples giant McCormick & Co. (MKC) and insurer Cigna Corp. (CI).

FlexShares Quality Dividend Defensive Index Fund (QDEF)

Lesser-known ETF issuer FlexShares has found an interesting niche with its defensive dividend fund, which now commands more than $300 million in assets. The strategy involves a curated quest for stocks with strong dividends and that exhibit a beta of less than 1. For those unfamiliar with investing Greeks, beta measures correlation or deviation from the market. A stock with a beta of 1 moves in lockstep with the market, a stock with a beta of zero moves with complete independence and a stock with a beta of 2 moves twice as fast in the same direction. Low beta is a wise choice for defensive investors.

Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)

If you like the income angle in your defensive stocks, the SPHD fund takes that focus to the next level with a 30-day yield of about 4.3 percent for its portfolio of 50 holdings, including hospital operator HCP (HCP) and power company PPL Corp. (PPL). It’s worth noting, of course, that 50 stocks isn’t a terribly deep list. Also, the portfolio is biased toward utilities and real estate with about 40 percent of total assets in those two segments alone. The selective nature may appeal to some investors, but remember that reliance on a focused list could hurt if just a small number of these stocks see trouble.

iShares Core Conservative Allocation ETF (AOK)

A multi-asset fund of funds, AOK is a great for investors who want to be a bit more conservative in their asset allocation and don’t want the hassle of rebalancing their portfolio regularly. This iShares fund is actually comprised of seven different iShares ETFs, but its top position is in the iShares Core Total USD Bond Market (IUSB) that makes up 60 percent of the portfolio. Of course, holding just bonds comes with its own risks — particularly in a rising interest rate environment — so the fund balances that out with equity funds to provide diversification and stability.

Vanguard Short-Term Bond ETF (BSV)

Investors can avoid some of the riskier parts of the bond market with the BSV fund. This ETF holds only short duration bonds with a maturity of one to five years, and all the underlying bonds have investment grade ratings — meaning they are only of the highest quality. That includes government bonds from the U.S. Treasury, as well as corporate bonds from reliable companies including Goldman Sachs Group (GS) and Anheuser-Busch InBev (BUD). Since these short-term loans to rock solid borrowers are pretty much a sure thing, the yield is only 3 percent at present. But if you want stability, this defensive fund is worth a look.

SPDR Gold Trust (GLD)

If you’re worried about your stock exposure but not interested in the admittedly anemic returns of short-term bonds, then a little bit riskier but much more interesting is an investment in gold — starting with the massive $35 billion GLD ETF. This fund is a direct play on bullion prices akin to buying gold bars, but without the hassle of storage or carting those bars to a buyer when you want to sell. Historical data shows gold is uncorrelated to stocks. That can be a good way to hang tough in a downturn, but remember being uncorrelated doesn’t mean gold is stable or immune to declines.

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