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5 Defensive Investment ETF Strategies for Your Portfolio
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After three-month-long resiliency in the stock market, volatility roared back in recent weeks on growing inflation worries, the uncertain timing of Fed rate cuts and escalating geopolitical tension in the Middle East. The combination of these factors has made investors jittery, compelling them to revisit their portfolios.
In fact, a growing number of investors believe the U.S. economy is headed for a "no landing" scenario, in which inflation doesn't reach the Fed's 2% target but the economy keeps growing, per the latest Bank of America's Global Fund Manager Survey. About 36% of respondents said they believe the most likely outcome for the global economy in the next 12 months is a "no landing." This is up from 23% seen a month ago. Meanwhile, about 54% of the respondents believe that a soft landing — where economic growth slows but not to the point of recession, and inflation returns to its historical average — is the most likely outcome.
In such a scenario, investors should bet on defensive investments. A defensive investment in the stock market is designed to minimize risk and protect your portfolio during market downturns. It typically involves investing in stable, low-volatility stocks that have a history of consistent performance, even during economic downturns (read: 5 ETF Zones to Keep Your Money Safe Amid Market Volatility).
As such, we have highlighted five such strategies:
Bet on Blue Chips
Blue-chip stocks are shares of large, well-established companies with a history of stable earnings and dividends. They are typically less volatile than smaller-cap stocks and provide a reliable income stream. Blue-chip stocks are considered a safer investment due to their financial stability, lower volatility and ability to weather economic downturns.
While there are several ETFs targeting blue-chip companies, Vanguard Mega Cap Growth ETF (MGK - Free Report) , SPDR Dow Jones Industrial Average ETF Trust (DIA - Free Report) and iShares S&P 100 ETF (OEF - Free Report) are the most popular. DIA, MGK, and OEF have a Zacks ETF Rank #1 (Strong Buy), #2 (Buy) and #3 (Hold), respectively (read: 5 Beaten-Down Top-Ranked Stocks to Buy in S&P 500 ETF).
Focus on Dividends
Dividend-paying stocks provide a steady income stream and help mitigate potential losses during weaker market periods. These stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF (DGRO - Free Report) , having a Zacks ETF Rank #1 each, fits well in this category.
Picking Low-Beta ETFs
Beta is a measure of a stock's volatility relative to the market. Low-beta stocks tend to have lower price fluctuations than the market, providing stability during market downturns. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile, while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market.
That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market crumbles. Core Alternative ETF (CCOR - Free Report) , with a beta of 0.09, and Innovator Defined Wealth Shield ETF (BALT - Free Report) , with a beta of 0.10, could be compelling picks.
Invest in Defensive Sectors
Certain sectors, such as consumer staples, utilities and healthcare, tend to be less sensitive to economic cycles and more resistant to market downturns. These generally act as a safe haven during political and economic turmoil. Stocks in these sectors generally provide higher returns in troubled times (read: 3 Safe-Haven ETFs to Gain on Middle East Crisis).
Investors seeking exposure to these sectors could find Consumer Staples Select Sector SPDR ETF (XLP - Free Report) , Global X U.S. Infrastructure Development ETFPAVE and Vanguard Health Care ETF (VHT - Free Report) intriguing. These funds have a Zacks ETF Rank #1, #2 or #3, respectively.
Diversification
Investors should diversify their portfolios across various asset classes and sectors. This helps spread risk and reduce the impact of underperformance in any single investment. Diversification can be done in various ways like investing in multi-assets, a variety of sectors, different countries or regions, a wide range of market caps, investment styles and many others.
In this regard, multi-asset ETFs like iShares Core Growth Allocation ETF (AOR - Free Report) and iShares Core Aggressive Allocation ETF (AOA - Free Report) , and long-short ETFs like Global X S&P 500 Covered Call ETF XYLD and First Trust Long/Short Equity ETF (FTLS - Free Report) could be good options. Multi-asset ETFs offer huge diversification benefits by investing across different asset classes, which have low correlations, thereby reducing overall volatility. These aim to provide a high level of current income with stability and potential for long-term appreciation while avoiding the downside risk of a specific asset class.
Meanwhile, a long/short strategy takes the best of both bull and bear predictions by involving buying and short selling of equities at the same time. This strategy is primarily used by hedge funds and involves taking long positions (buy) in stocks that are expected to increase in value and short positions (short sell) in stocks that are expected to decrease in value.
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5 Defensive Investment ETF Strategies for Your Portfolio
After three-month-long resiliency in the stock market, volatility roared back in recent weeks on growing inflation worries, the uncertain timing of Fed rate cuts and escalating geopolitical tension in the Middle East. The combination of these factors has made investors jittery, compelling them to revisit their portfolios.
In fact, a growing number of investors believe the U.S. economy is headed for a "no landing" scenario, in which inflation doesn't reach the Fed's 2% target but the economy keeps growing, per the latest Bank of America's Global Fund Manager Survey. About 36% of respondents said they believe the most likely outcome for the global economy in the next 12 months is a "no landing." This is up from 23% seen a month ago. Meanwhile, about 54% of the respondents believe that a soft landing — where economic growth slows but not to the point of recession, and inflation returns to its historical average — is the most likely outcome.
In such a scenario, investors should bet on defensive investments. A defensive investment in the stock market is designed to minimize risk and protect your portfolio during market downturns. It typically involves investing in stable, low-volatility stocks that have a history of consistent performance, even during economic downturns (read: 5 ETF Zones to Keep Your Money Safe Amid Market Volatility).
As such, we have highlighted five such strategies:
Bet on Blue Chips
Blue-chip stocks are shares of large, well-established companies with a history of stable earnings and dividends. They are typically less volatile than smaller-cap stocks and provide a reliable income stream. Blue-chip stocks are considered a safer investment due to their financial stability, lower volatility and ability to weather economic downturns.
While there are several ETFs targeting blue-chip companies, Vanguard Mega Cap Growth ETF (MGK - Free Report) , SPDR Dow Jones Industrial Average ETF Trust (DIA - Free Report) and iShares S&P 100 ETF (OEF - Free Report) are the most popular. DIA, MGK, and OEF have a Zacks ETF Rank #1 (Strong Buy), #2 (Buy) and #3 (Hold), respectively (read: 5 Beaten-Down Top-Ranked Stocks to Buy in S&P 500 ETF).
Focus on Dividends
Dividend-paying stocks provide a steady income stream and help mitigate potential losses during weaker market periods. These stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF (DGRO - Free Report) , having a Zacks ETF Rank #1 each, fits well in this category.
Picking Low-Beta ETFs
Beta is a measure of a stock's volatility relative to the market. Low-beta stocks tend to have lower price fluctuations than the market, providing stability during market downturns. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile, while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market.
That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market crumbles. Core Alternative ETF (CCOR - Free Report) , with a beta of 0.09, and Innovator Defined Wealth Shield ETF (BALT - Free Report) , with a beta of 0.10, could be compelling picks.
Invest in Defensive Sectors
Certain sectors, such as consumer staples, utilities and healthcare, tend to be less sensitive to economic cycles and more resistant to market downturns. These generally act as a safe haven during political and economic turmoil. Stocks in these sectors generally provide higher returns in troubled times (read: 3 Safe-Haven ETFs to Gain on Middle East Crisis).
Investors seeking exposure to these sectors could find Consumer Staples Select Sector SPDR ETF (XLP - Free Report) , Global X U.S. Infrastructure Development ETF PAVE and Vanguard Health Care ETF (VHT - Free Report) intriguing. These funds have a Zacks ETF Rank #1, #2 or #3, respectively.
Diversification
Investors should diversify their portfolios across various asset classes and sectors. This helps spread risk and reduce the impact of underperformance in any single investment. Diversification can be done in various ways like investing in multi-assets, a variety of sectors, different countries or regions, a wide range of market caps, investment styles and many others.
In this regard, multi-asset ETFs like iShares Core Growth Allocation ETF (AOR - Free Report) and iShares Core Aggressive Allocation ETF (AOA - Free Report) , and long-short ETFs like Global X S&P 500 Covered Call ETF XYLD and First Trust Long/Short Equity ETF (FTLS - Free Report) could be good options. Multi-asset ETFs offer huge diversification benefits by investing across different asset classes, which have low correlations, thereby reducing overall volatility. These aim to provide a high level of current income with stability and potential for long-term appreciation while avoiding the downside risk of a specific asset class.
Meanwhile, a long/short strategy takes the best of both bull and bear predictions by involving buying and short selling of equities at the same time. This strategy is primarily used by hedge funds and involves taking long positions (buy) in stocks that are expected to increase in value and short positions (short sell) in stocks that are expected to decrease in value.