The tail end of 2018 didn’t shape up to be great for the investing public. The markets — down 6%-plus for the full year — fell into a turmoil and it looked as if the bulls were finally rolling over into a big bear market. Stocks, commodities and other risk assets tanked as global growth worries moved to the forefront of many investors’ minds.
At the time of writing, the S&P 500 is now roughly 12% below its recent September highs, while the tech-heavy Nasdaq is down around 14% from its recent peaks. But just as it looked like the markets’ woes could spill over into the New Year, the market got its Santa Claus rally after all. From Dec. 24 to Dec. 31, the S&P jumped 6.6% while the Nasdaq gained 7%. Year-to-date so far, the S&P is up another 3%. The Nasdaq, 4.4%.
That doesn’t mean that the bear market is over. Far from it. This is a great time to strengthen your portfolio’s diversity, introducing a number of defensive stocks to batten down the hatches in case more dark clouds roll over the horizon.
Luckily, exchange-traded funds (ETFs) make shifting portfolio strategy a breeze.
By using ETFs, investors can add a dose of safety to their portfolios and potentially save themselves some losses as the bear takes over. Moreover, they can do it quickly with one ticker access. There’s no major selling or buying with ETFs. That makes using them the perfect way to hedge a portfolio.
With that, here are three defensive ETFs to buy right now to limit a potentially elongated bear market’s growl.
Invesco Defensive Equity ETF (DEF)
Expense Ratio: 0.60%, or $60 per $10,000 invested
One of the oldest and most successful ETFs providing safety to portfolios is the $165 million Invesco Defensive Equity ETF (NYSEARCA: DEF ). Heck, it even has “defense” as part of its name. The key to that defense comes down t its underlying construction.
DEF tracks the Invesco Defensive Equity Index . That benchmark combs through the universe of large-cap stocks and finds those superior risk-return profiles during periods of stock market weakness as well as offer gains during bear markets. The basic underlying idea is to create a portfolio of stocks that should hold up- or at least fall a lot less than the broader market- when things get dicey.
The ETF currently holds 100 different stocks- with its top holdings reading like a who’s who of America’s “bedrock” stocks, including drugmaker Eli Lilly & Co (NYSE: LLY ) and consumer products firm Hormel Foods (NYSE: HRL ). Stocks in the ETF are equally weighted so that investors can gain the most from each holding’s defensive nature. Healthcare stocks make up around 20% of the portfolio, while industrials and tech make much around 15% of assets each.
As far as performance goes, DEF has been one of the better defensive ETFs around. During market troubles, the fund has managed to hold its own. Considering 2018’s performance, DEF has managed to beat the S&P 500. That outperformance should continue next year as the market drifts lower.
Defensive ETFs To Buy Today: iShares Select Dividend ETF (DVY)
Expense Ratio: 0.39%
Investors often forget one of the best ways to score some great defense is through firms that pay hefty dividends. After all, making a few percentage points in yield can mean the difference between a loss and gain at the end of the day during drifting and sinking markets. More importantly, reinvested dividends can propel an overall position that much higher as prices rebound. Dividend ETFs such as the iShares Select Dividend ETF (NYSEARCA: DVY ) make it easy to add a dose of dividends to a portfolio.
DVY can be seen as a “catch-all” fund when it comes to dividend ETFs. The ETFs underlying index — Dow Jones U.S. Select Dividend Index — looks at U.S. stocks that have long histories of paying dividends as well as high yields. This allows investors to score a high yield today as well as one that will last the test of time. That’s perfect for today’s low return environment. The more pennies you can pick-up today, the better.
And while the idea of “high yield” may sound scary, investors shouldn’t fret. DVY’s top holdings are not fly-by-night names. Pfizer (NYSE: PFE ) and utility Dominion Energy (NYSE: D ) are some of the stalwarts dotting its top-holdings. Those stalwarts and its remaining holdings help produce a tasty 3.51% yield.
All in all, dividends can help boost a portfolios defense and DVY could be one of the best ETFs to get that exposure.
SPDR Gold Shares (GLD)
Expense Ratio: 0.40%
When the going gets tough, investor’s flock to gold. That relationship has been tested time and time again. And lately, the various gold ETFs are continuing the trend. Gold prices have spiked in recent weeks as the market has sputtered and finished December at six-month highs. And if you remember, six months ago was the last time the market had a slight meltdown. Because of this, gold ETFs could be one of the best ways to kind of hedge the upcoming storm in the year ahead.
And you can’t get much better than the SPDR Gold Shares (NYSEARCA: GLD ).
The $33.5 billion GLD is one of the largest ETFs in the world and is the behemoth among the gold ETFs. The fund doesn’t use futures to get its gold exposure but owns physical bullion stored in a vault on behalf of investors. That keeps GLD’s share price closely mirroring what is happening in the gold market. Each share of the ETF represents a 10th of an ounce of gold. So, buy 10 shares and you have an ounce of physical gold in your portfolio. This makes the GLD one of the easiest ways to add exposure to the asset class.
There’s no need to pay exorbitant fees to own gold and gain from its hedging abilities. In fact, GLD costs a cheap 0.40% in expenses. Given the markets current state, adding a touch of gold could be one of the best defenses around.
At the time of writing, Aaron Levitt did not have an exposure to any ETF or stock listed.
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