While these Vanguard funds may not completely shield investors from losses during a market crash, they can definitely help cushion the impact.
Investors might be feeling a bit too comfortable. The S&P 500 (^GSPC 0.43%) has enjoyed double-digit returns for three years straight, even exceeding 23% in two of those years.
It feels almost strange to consider the possibility of a stock market crash. Yet, two indicators—the S&P 500 Shiller CAPE ratio and the Buffett index (which gauges the market’s total capitalization as a percentage of GDP)—suggest that tougher times could be on the horizon.
So, what can investors do to safeguard their portfolios against a possible downturn? One option might be to invest in these three Vanguard exchange-traded funds (ETFs).
1. Vanguard Short-Term Treasury Bond ETF
Traditionally, long-term U.S. Treasuries were seen as a solid safe haven. However, an analysis by investment managers at State Street (STT 0.43%) revealed last year that “long-term government bonds can no longer reliably offset equity drawdowns.” This perspective has gained traction, especially with China’s U.S. debt holdings hitting a low not seen since 2008 and Denmark’s recent decision to divest from U.S. debt due to concerns over the country’s financial situation.
Conversely, short-term government bonds present a different scenario. State Street’s findings indicate that short-term Treasuries offer a safer alternative for caution-minded investors. This is why I’m highlighting the Vanguard Short-Term Treasury Bond ETF (VGSH +0.07%) as the first option.
This Vanguard fund comprises 92 U.S. Treasury securities with an average duration of 1.9 years and comes with a low expense ratio of 0.03%, making it accessible for many. If a market crash occurs, you probably won’t see significant profits from this ETF. However, its 30-day SEC yield hovers around 3.6%, and the risk of losing money is minimal.
2. Vanguard Total Bond Market ETF
Besides U.S. Treasuries, investment-grade bonds often represent a safe haven for your cash. Typically, but not always, when stock prices decrease, bond prices rise. The Vanguard Total Bond Market ETF (BND 0.04%) might just be one of the best options for protecting your portfolio against downturns.
This ETF holds a whopping 11,444 bonds, with an average duration of 5.7 years, placing it in the medium-duration category. About 69% of its assets are U.S. government bonds, while the remainder consists of corporate bonds rated BBB or above.
While the Vanguard Total Bond Market ETF carries slightly more risk than investing solely in short-term Treasuries, it also offers increased potential rewards, marked by a 30-day SEC yield nearing 4.2%. Vanguard is promoting the ETF as a means to diversify risks associated with stock ownership, and, honestly, I think it checks those boxes pretty well.
3. Vanguard US Minimum Volatility ETF
You can probably guess why the Vanguard US Minimum Volatility ETF (VFMV +0.36%) made it onto this list just by its name. While the fund does focus on stocks, which generally carry more risk compared to U.S. Treasuries and bonds, its strategy uses quantitative models to selectively pick stocks that are expected to have lower volatility.
Currently, the ETF includes 186 stocks from 10 different sectors. Some of the notable holdings are Lam Research (LRCX 5.93%), Johnson & Johnson (JNJ 0.06%), and Coca-Cola Company (KO +1.94%). Importantly, no single stock makes up more than 1.6% of the total portfolio.
This ETF has a slightly higher annual expense ratio of 0.13%, but it’s still comparatively low. While it won’t entirely evade a significant drop in stock prices, it does have a beta of 0.56, suggesting it won’t fall as sharply as the broader market during a downturn.
