Even with the S&P 500 reaching new heights, there are some concerning indicators on the horizon. The job market appears to be stagnating; inflation jumped noticeably in March, and the ongoing conflict in Iran adds a layer of unpredictability to the situation.
While corporate earnings are expected to remain robust in the near future, a downturn in economic fundamentals could quickly change that narrative. If that happens, the stock market may find itself in a precarious position, leading to significant declines in stock values.
Many investors have a heavy allocation in tech stocks. In fact, more than 30% of assets in even a supposedly diversified S&P 500 portfolio are tied up in this sector. In a climate where minimizing risk is essential, this trend could pose serious risks.
Because of this, it’s worth exploring investments aimed at providing some protection. Three Vanguard ETFs stand out for their features designed to shield investors from the next market downturn.
Important points
- Investors have various methods to safeguard their portfolios during market declines.
- Sluggish job growth indicates that companies may be adjusting their costs in response to reduced demand.
- In 2022’s bear market, the Vanguard S&P 500 ETF fell approximately 19%, while health care and dividend stocks performed significantly better.
- With inflation reaching 3.3% in March, Treasury Inflation-Protected Securities (TIPS) could be a wise investment choice right now.
1. Vanguard High Dividend Yield ETF
Dividend stocks are often viewed as more defensive, as companies in this category tend to be more established and generate steady cash flows to support ongoing shareholder dividends.
The Vanguard High Dividend Yield ETF (VYM 0.43%) takes a straightforward approach to high-yield investing by selecting the top 50% based on yield from a broad array of stocks. This mix of diversification and targeting value stocks typically does well during down markets.
2. Vanguard Healthcare ETF
Healthcare stocks are often considered one of the most resilient sectors in economic downturns. People may cut spending elsewhere, but healthcare spending tends to remain steady regardless of the economic situation.
The Vanguard Healthcare ETF (VHT 0.42%) invests in a diverse range of companies engaged in healthcare products, services, technology, and equipment. While these healthcare stocks might not always yield positive returns during market slumps, their consistent income makes them more likely to endure.
3. Vanguard Short Term TIPS ETF
Inflation has been a significant concern in the U.S. economy since the COVID-19 pandemic, especially with the latest escalations in the Iran conflict. Typically, rising inflation can exacerbate market declines, so it makes sense to aim for inflation protection within your portfolio.
The Vanguard Short Term TIPS ETF (VTIP +0.14%) invests in government bonds that adjust their value according to inflation rates, helping maintain purchasing power even as prices rise.
Vanguard ETF: Key Facts and Indicators
| ETF | ticker | expense ratio | dividend yield | parrot | defensive role |
|---|---|---|---|---|---|
| Vanguard High Dividend Yield ETF | VYM | 0.04% | 2.4% | 76 billion dollars | Low beta value, stable |
| Vanguard Healthcare ETF | VHT | 0.09% | 1.4% | $16 billion | Resilience during recessions |
| Vanguard Short Term TIPS ETF | VTIP | 0.03% | 0.6% | $18 billion | Hedge against inflation |
Data source: Vanguard Funds website.
These ETFs are designed to perform well during bear markets, though their individual strategies vary. Some focus on companies with cash reserves likely to endure tough times. Others invest in sectors where people usually keep spending. It’s wise to consider how to defend your portfolio against potential downturns. If you’re sensing that a bear market is on the horizon, these three Vanguard ETFs could be a solid starting point.
