by David Fabian | April 30, 2014 2:37 pm
Rather than completely pulling back your portfolio exposure to fixed-income or cash, you can reposition your equity sleeve to more defensive areas that still offer compelling growth opportunities.
Investors that are concerned about the recent volatility in the stock market might want to consider looking at conservative equity strategies to protect their assets.
There are a number of defensive ETFs that have proven to be dual-purpose vehicles for steady capital appreciation and income despite the turmoil in high-beta sectors. Here’s a look at three you might want to consider:
DEF (Click to Enlarge) One under-the-radar exchange-traded fund that has had a very strong start to the year is the Guggenheim Defensive Equity ETF (DEF). This ETF is made up of 100 global stocks that constitute the Sabrient Defensive Equity Index, which provides exposure to market sectors that have historically performed well in down markets.
So far this year, DEF has gained 6.32% and recently hit a new all-time high this week. It also is worth noting that DEF has gained in every subsequent year since 2008, where it lost 30.42%. Currently this fund has more than $130 million positioned in energy, utilities and telecommunications, which combined make up more than 55% of the total portfolio.
One of the things I like about DEF is that the underlying holdings are well-diversified to help weather volatility while still providing plentiful opportunity for capital appreciation in an up market. The net expense ratio of this ETF is currently listed at 0.65%.
USMV (Click to Enlarge) Another ETF that has long been a favorite of mine for reducing draw down is the iShares MSCI USA Minimum Volatility ETF (USMV). This fund provides exposure to 139 large and mid-cap stocks in the United States that are selected based on a screen of the lowest price fluctuations among their peers. This strategy essentially seeks to minimize the peaks and valleys associated with traditional stock market indices.
The top sector weightings in USMV include healthcare, consumer staples, and technology firms. This portfolio mix has helped push USMV to a gain of 3% so far in 2014, and as you can see on the chart the uptrend is still firmly intact.
Another advantage of this strategy is the rock-bottom expense ratio of just 0.15% that makes this ETF perfect for a core equity holding. The one drawback of USMV is that you won’t experience as much upside in a rapidly rising environment; however, conservative investors may be willing to forego that opportunity to mitigate downside risk.
AOR (Click to Enlarge)The last fund on my watch list with a defensive tilt is the iShares Growth Allocation ETF (AOR). This ETF is a “fund of funds” that incorporates other iShares equity and bond ETFs in its asset allocation strategy. The current makeup is tilted 65% stocks and 35% bonds, which makes it more of a balanced offering.
The advantage of the bonds in the portfolio is that they can often function as a shock absorber to cushion equity volatility. However, it still has just enough domestic and international stock exposure to warrant upside opportunity during bullish cycles.
The net expense ratio of this ETF is just 0.3%, and iShares lists the beta to the S&P 500 at 0.69. This means that you will essentially capture 70% of the upside in stocks based on the current underlying holdings.
Each of these funds can be used as core holdings or tactical opportunities depending on your current portfolio positioning. While they are not designed to completely eliminate the risk of declining stock prices, they should give you a measured dampening effect when volatility rears its ugly head. In addition, they have the opportunity to still participate in a rising stock environment during growth phases.
David Fabian is Managing Partner and Chief Operations Officer of FMD Capital Management. As of this writing, he was long USMV. To get more investor insights from FMD Capital, visit their blog.
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