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What we’re looking at may be the most paradoxical environment in decades. Defensive ETFs like the Fidelity MSCI Consumer Staples Index ETF (NYSEARCA:FSTA), Vanguard Utilities Index Fund ETF (NYSEARCA:VPU), and iShares US Aerospace & Defense ETF (BATS:ITA) are crushing the S&P 500 and Nasdaq-100 stocks. This is not because these defensive stocks are somehow posting explosive financial statements, but rather because investors are getting spooked by growth and tech.
And the spook is not due to tech companies posting terrible earnings reports. Every major tech company is still growing and beating earnings reports.
It’s simply due to the broader market no longer being conducive to growth. The smart investors are seeing parallels to 2022 and are quickly re-adjusting. Inflation will likely start moving up again due to high oil prices and heightened military spending. The Federal Reserve then has an excuse to pause interest rate cuts, and growth investors might then start seeing red.
The S&P 500 software index is already down a quarter from October 2025 prices.
If AI hardware stocks give way, it will trigger even more investments into defensive ETFs like the following three.
Fidelity MSCI Consumer Staples Index ETF (FSTA)
Consumer staples stocks are rising fast, as this is often the first name that comes to mind when investors think of defensive stocks. FSTA’s top holding is Walmart (NYSE:WMT | WMT Price Prediction), followed by Costco (NASDAQ:COST) and Procter & Gamble (NYSE:PG). All three are longstanding retail companies with enough cash flow to ride out any recession or downturn. These are the stocks you’d want to hold if you expect a tech/growth slowdown, and money is already pouring in.
Better yet, FSTA can also act as a hedge against inflation. When you hold cash or treasuries, inflation will chip away at your gains. You can buy TIPS, but even that will just keep you flat. ETFs like FSTA are great hedges against inflation as retail companies remain healthy and customers are likely to bite their tongue and pay up anyway. When a retail company starts declining, the traffic just shifts to another name in the industry instead of declining altogether. Thus, holding an ETF that gives you broad-based exposure is a good idea.
FSTA is already up by 10.5% year-to-date and has a dividend yield of 2.13%. The expense ratio is very low at 0.08%. The SPY is down nearly 2%.
Vanguard Utilities Index Fund ETF (VPU)
Utilities are a proven safe haven to put your money into, because these companies are almost never out of fashion. Businesses in this sector grow alongside the rest of the country as people always need essential services. Even enterprises are now demanding services in recent years, and this is translating into healthy demand for utility stocks.
AI companies are clamoring to secure as much electricity as possible and are entering long-term contracts favorable to utility firms. The government is increasingly showing that it wants AI companies to secure their own supply to prevent the grid from being stressed. As a result, I see both consumers and enterprises powering the growth of utilities.
VPU is an obvious winner. It is one of the cheapest ETFs you can buy into to take advantage of the growth of utilities. VPU is up 10.3% year-to-date and provides a 2.5% dividend yield.
Your expenses on this ETF are just 0.09% annually, or $9 per $10,000.
iShares US Aerospace & Defense ETF (ITA)
Many don’t consider the aerospace and defense sector to be defensive in nature, but that has been wholly proven wrong. The conventional wisdom is that defense companies will always have demand due to government spending remaining strong, and every administration has ended up reinforcing that argument, no matter what they say to the public.
Investors in ITA were spooked back in 2025 as rumors swirled that we’d see 8% per-year defense cuts for 5 years straight, only for President Donald Trump to propose a $1.5 trillion defense budget for FY2027.
ITA is thus up 15.3% in just the past six months. The ongoing conflict could end abruptly, but Cuba still hangs in the balance, and a soft arms race with China will keep defense spending high indefinitely.
I prefer this ETF over others since you get exposure to big, reputable, and deep-rooted defense companies. They’re unlikely to disappoint you in the long run. Plus, buying ETFs in the defense industry is especially smart, since individual defense companies are competing over contracts.
ITA comes with a 0.38% expense ratio, but that’s worth it due to the massive outperformance.