3 Best Vanguard Funds for a Defensive Portfolio

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Even if you think the bull market still has strong enough legs to run a bit further, it’s not too soon to start making smart and tactical moves with some of the best Vanguard funds for a defensive portfolio.

vanguard-logo-185Researching and investing in the best defensive funds is not just about finding niche areas of the market that tend to hold up (or have minimal declines) in market downturns. It’s also about diversification and keeping costs low.

For example, the health sector is a classic example of a defensive investment type. But if you bought a mutual fund today that was heavily weighted to the biotechnology sub-sector of healthcare, a market correction could mean an outsized decline in price for biotech stocks that are now arguably overbought and more expensive than the broader health sector and the total stock market.

But a well-managed, plain vanilla health sector fund with low expenses can be a smart defensive move now and as part of a long-term portfolio. And this combination of diversification and low expense ratios is what you find in the best Vanguard funds for a defensive portfolio:

3 Best Vanguard Funds for a Defensive Portfolio: Vanguard Health Care (VGHCX)

3 Best Vanguard Funds for a Defensive Portfolio: Vanguard Health Care (VGHCX)
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 Expenses: 0.34%
Minimum Initial Investment: $3,000

Vanguard Health Care (VGHCX) is not just an outstanding defensive stock fund, it’s one of the best sector funds in the mutual funds universe.

VGHCH made our recent list of the best mutual funds to buy for the rest of 2015 for a few solid reasons. It covers a wide variety of health sector stocks at a low cost. It also helps that its well-managed and the market risk is not excessive because its not stuffed with overly-priced biotechnology stocks.

Vanguard Health Care can capture the near-term upside potential for health stocks but also miss the worst of the potential downside — should biotechnology have a big sell-off.

The big picture view on the health sector is that a combination of the advancement of cutting edge science, the power of new technologies and the aging U.S. population creates a great potential for long-term, market-beating growth. Taking the short-term defensive view, health sector stocks typically hold up in down markets, compared to the S&P 500.

For example, in 2008, when the S&P 500 had a -37% return, VGHCX was down half that amount with -18.5% return. Past performance is no guarantee of future returns, but there’s no doubt that Vanguard Health Care is an outstanding defensive mutual fund to own.

Top holdings for VGHCX include Bristol-Myers Squibb (BMY), Actavis (ACT) and UnitedHealth Group (UNH).

3 Best Vanguard Funds for a Defensive Portfolio: Vanguard Consumer Staples (VDC)

3 Best Vanguard Funds for a Defensive Portfolio: Vanguard Health Care (VGHCX)
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 Expenses: 0.12%
Minimum Initial Investment: None

If you want to capture a wide variety of consumer defensive stocks, all in one fund, Vanguard Consumer Staples (VDC) is a great ETF to get the job done.

The consumer defensive sector includes companies that manufacture food, beverages, household and personal products, or tobacco. These are considered “defensive” because they sell products that consumers will typically continue purchasing in difficult economic times.

Examples of such defensive names can be found in the top holdings of VDC, which include Proctor & Gamble (PG), Coca-Cola (KO), and Philip Morris (PM).

Vanguard also offers an outstanding mutual fund version, Vanguard Consumer Staples Index (VCSAX), but it’s only offered in the Admiral share class, which requires a $100,000 minimum initial investment.

3 Best Vanguard Funds for a Defensive Portfolio: Vanguard Utilities (VPU)

3 Best Vanguard Funds for a Defensive Portfolio: Vanguard Utilities (VPU)
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 Expenses: 0.12%
Minimum Initial Investment: None

Utilities stocks are a classic defensive investment type and one of the best ways to buy the sector is with Vanguard Utilities (VPU).

This ETF holds more than 80 utilities stocks and top holdings include Duke Energy (DUK), NextEra Energy (NEE) and Dominion Resources (D).

In 2015, the utilities sector has been hit with big price declines (VPU has fallen 10% in price year-to-date), which is primarily due to the expectation of rising interest rates. When the Federal Reserve tightens credit with rate hikes, yields on U.S. Treasury bonds are generally rising. With higher yields on bonds, investors will typically shift out of the riskier utilities stocks and rotate into the lower relative risk on bonds.

With that said, long-term investors could scoop up some utilities stocks at cheaper prices now. The forward-looking price-to-earnings ratio on the average holding in the Vanguard Utilities fund is about 17, which compares to a slightly higher reading on the S&P 500 of 19, as measured by the SPDR S&P 500 ETF (SPY).

Vanguard also offers an outstanding mutual fund version, Vanguard Utilities Index (VUIAX), but it’s only offered in the Admiral share class, which requires a $100,000 minimum initial investment.

As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds VDC in some client accounts. His No. 1 holding is his privately held investment advisory firm. Under no circumstances does this information represent a recommendation to buy or sell securities.

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