by Jeff Reeves | August 13, 2013 2:28 pm
The stock market is up about 19% so far in 2013, but we’ve seen a regular schedule of pullbacks every two months or so since January.
The pullbacks have gotten more substantial each time, and with front-loaded returns to protect and macro pressures such as “tapering” at the Federal Reserve or a slowdown in China … well, the next correction we get might be a big one.
So where can investors hide out?
Here are five crash-proof investments to consider, with built-in diversification and a strategy that is tailor-made to mitigate risk:
There are a host of bear-market funds out there, but most have a hard tie to a major index — for instance, the ProShares Short Dow30 ETF (DOG) that goes down almost exactly 1% for every 1% gain in the Dow Jones Industrial Average.
But the AdvisorShares’ Ranger Equity Bear ETF (HDGE) is different. This spring, when the major indices were up about 5%, HDGE was flat despite having a strategy of shorting stocks.
How does that happen? Well, because instead of just shorting an entire index, the management team makes strategic bets on bad stocks it expects to crash and burn. Top holdings right now include IBM (IBM), Caterpillar (CAT) and Monsanto (MON), among others.
HDGE is pretty good at picking bad stocks. And while the bear ETF has underperformed this year (no shock amid a 19% rally), it could be a good way to hedge your bets against a market correction.
Hence the ticker!
You might think it’s batty to go long on international investments after the rough year for China and Europe. But the time to buy is when there’s blood in the streets, right?
By averaging into a global mutual fund across the next few months, you have a good chance of finding long-term appreciation in your investment. And if you can rely on a good mutual fund manager to pick the best opportunities, all the better for you.
That’s where Lazard International Strategic Equity Fund (LISOX) comes in. With a modest gross expense ratio of 1.13%, the fund costs you just $113 a year for every $10,000 you invest. And its active management style makes sure you are in the best global opportunities.
Right now, top holdings include Taiwan appliances company Sampo (SAXPY), European healthcare giant Sanofi (SNY) and Japanese manufacturer Makita (MKTAY).
You might scoff at the notion of global trading, but in the past 12 months, this Lazard fund has returned almost 29% vs. about 19% for the S&P 500.
That should prove to you the LISOX mutual fund is worth a look.
It’s a no-brainer but worth rehashing: Dividends remain one of the most powerful ways to give your portfolio long-term upside and mitigate short-term risks of a market pullback in stable, cash-rich stocks.
The Vanguard Dividend Appreciation ETF (VIG) is the most popular way to tap into this trend with a whopping $19.1 billion under management, making it the largest dividend ETF by assets under management.
The strategy is simple, focusing on more than 100 securities that have a record of increasing dividends for each of the past 10 years or more. Mainstay blue chips like PepsiCo (PEP), Coca-Cola (KO) and and Procter & Gamble (PG) make up its top holdings right now.
And as is typical of Vanguard, the cost is dirt-cheap. A gross expense ratio of just 0.1% means a mere $10 a year on $10,000 is all it costs you for this built-in diversification and income-focused fund.
While the Vanguard Dividend Appreciation ETF (VIG) is a good option, it’s worth noting that 24% of its holdings are in consumer goods with another 17% in consumer services. That’s a big weighting for consumer-related businesses.
If low-risk income is what you’re after, why not then just make a big play on utility stocks? These companies are essentially legalized monopolies that have high barriers to entry thanks to government regulation. They’ll never give mammoth growth, of course, but as a low-risk sector you can’t do much better than these players.
The Vanguard Utilities Index Fund Admiral Shares (VUIAX) is benchmarked to the MSCI US Investable Market Utilities 25/50 Index. That gives it a rock-bottom expense of just 0.14%, or $14 for every $10,000 invested. Top holdings right now include Duke Energy (DUK), Southern Co. (SO) and NextEra (NEE).
If you’re looking for low volatility, the PowerShares S&P 500 Low Volatility Portfolio (SPLV) — as advertised — offers just what you’re looking for. This exchange-traded fund is based on the S&P 500 Low Volatility Index.
The underlying index behind SPLV is comprised of 100 equities in the benchmark S&P 500 with the lowest volatility, as measured by standard deviation of the security’s daily price returns over the prior year.
With over $4.7 billion in assets, SPLV is the largest fund of this kind on Wall Street and hardly a fad. Top holdings right now include Johnson & Johnson (JNJ), General Mills (GIS), Clorox (CLX) and other boring but stable blue chips.
Certainly not sexy … but if you’re looking for a defensive investment, SPLV has a lot to offer.
Jeff Reeves is the editor of InvestorPlace.com and the author of The Frugal Investor’s Guide to Finding Great Stocks. Write him at firstname.lastname@example.org or follow him on Twitter via @JeffReevesIP. As of this writing, he did not own a position in any of the stocks named here.
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