5 Defensive Investment ETF Strategies for Your Portfolio
The stock market has been witnessing huge volatility. Inflation and interest rate concerns have taken center stage this year, with investors closely monitoring the actions of central banks and policymakers. Rising inflation has led to higher interest rates, which has impacted the stock market, particularly growth-oriented sectors that are sensitive to changes in interest rates.
Growing geopolitical issues and recession fears have added to the concerns. The debt ceiling showdown between Congress and the White House is the latest chapter in the stock market weakness.
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. 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 (read: ETFs to Bet on Mega-Cap Tech Stocks).
While there are several ETFs targeting blue-chip companies, Vanguard Mega Cap Growth ETF MGK, SPDR Dow Jones Industrial Average ETF Trust DIA and iShares S&P 100 ETF OEF are the most popular. DIA has a Zacks ETF Rank #1 (Strong Buy), while the other two have a Zacks ETF Rank #3 (Hold).
Focus on Dividends
The 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 (read: 5 Market-Beating High-Dividend ETFs to Consider).
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 and iShares Core Dividend Growth ETF DGRO, having a Zacks ETF Rank #1 each, fits well in this category.
Hunt for 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. Invesco S&P 500 Downside Hedged ETF PHDG and Nationwide Nasdaq-100 Risk-Managed Income ETF NUSI 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. The Zacks Rank #2 (Buy) Invesco Defensive Equity ETF DEF could be an excellent pick. It offers exposure to companies that potentially have superior risk-return profiles during periods of stock market weakness while still offering the potential for gains during periods of market strength (Forget Recession Fears, Invest in These Safe ETFs).
Investors seeking concentrated exposure to the particular sector could find top-ranked Consumer Staples Select Sector SPDR ETF XLP, Global X U.S. Infrastructure Development ETF PAVE and Vanguard Health Care ETF VHT intriguing. All these funds have a Zacks ETF Rank #1 (Strong Buy) or 2, suggesting their outperformance in the coming months.
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 and iShares Core Aggressive Allocation ETF AOA, and long-short ETFs like Global X S&P 500 Covered Call ETF XYLD and First Trust Long/Short Equity ETF FTLS 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 while short positions (short sell) in stocks that are expected to decrease in value.
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Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
Vanguard Health Care ETF (VHT): ETF Research Reports
Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
First Trust Long/Short Equity ETF (FTLS): ETF Research Reports
Invesco Defensive Equity ETF (DEF): ETF Research Reports
iShares Core Growth Allocation ETF (AOR): ETF Research Reports
iShares Core Dividend Growth ETF (DGRO): ETF Research Reports
Vanguard Mega Cap Growth ETF (MGK): ETF Research Reports
iShares S&P 100 ETF (OEF): ETF Research Reports
iShares Core Aggressive Allocation ETF (AOA): ETF Research Reports
Invesco S&P 500 Downside Hedged ETF (PHDG): ETF Research Reports
Global X U.S. Infrastructure Development ETF (PAVE): ETF Research Reports
Nationwide Nasdaq-100 Risk-Man (NUSI): ETF Research Reports
Global X S&P 500 Covered Call ETF (XYLD): ETF Research Reports