Key Points
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To brace against market pullbacks, add some defensive stocks or funds to your mix.
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Defensive industries include healthcare, utilities, and consumer staples.
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Dividend payers can be great to hold in market downturns, too.
Is a stock market crash imminent? Well, no one knows for sure, but roughly 38% of investors surveyed by the American Association of Individual Investors reported expecting the stock market to decline over the coming six months (as of early September). Another worrisome sign is the S&P 500‘s historically high valuation. The cyclically adjusted price-to-earnings (CAPE) ratio was recently at 41.4, far higher than its long-term average of 17.4 and close to an all-time high of 44 reached in 1999 before the dot-com bubble turned into a crash.
It’s generally not smart to jump out of the market fearing a crash — because that’s market timing — and your timing may well be off. Instead, to calm your jitters, you might just invest in some exchange-traded funds (ETFs) that are built to withstand bear markets better than average investments.
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A market crash or correction will happen one of these days. Here are some ETFs to consider, to brace against that. Each is focused on a “defensive” part of the economy — on businesses that consumers will generally keep buying from, no matter how the economy is doing.
Vanguard Health Care Index Fund ETF
The Vanguard Health Care Index Fund ETF(NYSEMKT: VHT) is a prime example. In a recession, people will still need healthcare — they will still buy their medications (to the degree that they’re able to) and will still visit doctors. This fund recently held 417 stocks, with top holdings including Eli Lilly, Johnson & Johnson, and UnitedHealth Group. Its annual fee is just 0.09%, costing you $9 annually for every $10,000 you have invested in the fund, and its dividend yield was recently 1.5%.
State Street Utilities Select Sector SPDR ETF
The State Street Utilities Select Sector SPDR ETF(NYSEMKT: XLU) also has a low annual fee — just 0.08% — and its dividend yield was recently 2.8%. It’s focused on utility-related companies, such as NextEra Energy, Southern Co., and Duke Energy, and it recently held about 31 of them. When the economy flags, people and businesses will still need to keep the lights on.
Vanguard Consumer Staples Index Fund ETF Shares
The Vanguard Consumer Staples Index Fund ETF Shares (NYSEMKT: VDC) specializes in consumer staples companies, recently holding 103 of them, such as Walmart, Procter & Gamble, and Coca-Cola. Its annual fee is 0.09%, and its recent dividend yield 2.1%. Clearly, no matter whether the economy is up or down, gobs of people will want to keep buying shampoo, soda, and items from Walmart.
Schwab U.S. REIT ETF
The Schwab U.S. REIT ETF(NYSEMKT: SCHH) is another defensive ETF, in that it holds many real estate investment trusts (REITs) — companies that buy properties and lease them out. These are typically multiyear leases, if not multidecade, so that income is likely to keep rolling to the REITS. The ETF’s annual fee is just 0.07%, and its recent dividend yield 2.8%. Its recent 117 holdings included Prologis, American Tower, and Realty Income.
Schwab U.S. Dividend Equity ETF
A solid dividend-focused ETF such as the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is also worth considering. (There are other good dividend ETFs, too, of course.) Why? Because dividend-paying companies tend to be established and profitable, with relatively dependable income. So they’re more solid than the average stock. This ETF has an ultra-low annual fee of 0.06% and a recent dividend yield of 3%. Its top holdings (out of 98) recently included Merck, Chevron, and Verizon Communications.
Dividend income is particularly nice during recessions because while some stocks may be stagnating, healthy dividend payers will keep delivering cash to shareholders.
Whether the stock market pulls back this year, next year, or the year after, these ETFs will likely keep growing — and delivering a little income regularly, too. Take a closer look at any of these funds that intrigue you.
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Selena Maranjian has positions in American Tower, NextEra Energy, Procter & Gamble, Realty Income, Schwab U.S. Dividend Equity ETF, and Verizon Communications. The Motley Fool has positions in and recommends American Tower, Chevron, Eli Lilly, Merck, NextEra Energy, Prologis, Realty Income, and Walmart. The Motley Fool recommends Duke Energy, Johnson & Johnson, UnitedHealth Group, and Verizon Communications. The Motley Fool has a disclosure policy.