Winter is coming, and we aren’t talking about the popular TV show Game of Thrones.
No, winter is coming for the markets — or at least the metaphorical winter is. Stocks, commodities and other risk assets have tanked as global growth worries have moved to the forefront of many investors’ minds.
As of this writing, the Dow Jones Industrial Average is within striking distance of falling below the psychological 16,000 level — and actually did so at times on Tuesday.
Don’t think for a second that investors’ concerns aren’t real. China — which is the largest driver for a whole host of natural resources — is stalling, while Europe continues to be a mess and requires constant support from the European Central Bank.
Meanwhile, here in the U.S., even with recent boosts, consumer confidence is still shaky at best, and many firms have reported lower guidance based on the global state of malaise.
All in all, investors may be in for a rough quarter, which is why defense maybe the best offense. And the best way to get that defense is through exchange-traded funds. There are a whole host of ETFs that allow investors to buckle down for the approaching winter.
Here’s four of the best ETFs to buy:
Best ETFs for the Winter: Guggenheim Defensive Equity ETF (DEF)
Expenses: 0.65%, or $65 for every $10,000 invested
With “defense” as part of the name, the Guggenheim Defensive Equity ETF (DEF) could be one of the best ETFs to buy for the next quarter.
DEF tracks the Sabrient Defensive Equity Index, which screens for factors like valuation, low debt/conservative accounting practices, dividend payout histories and how the underlying stocks performed during periods of market strife.
The underlying idea is to create a portfolio of stocks that should hold up — or at least fall a lot less than the broader market — when things get wonky.
The Guggenheim fund currently holds about 100 different stocks, with its top holdings reading like a who’s who of America’s “bedrock” stocks, including utility Consolidated Edison (ED) and consumer products firm Clorox (CLX). Stocks in the ETF are equally weighted, and financials (27%), utilities (19%) and telecoms (13%) making up the highest sector rankings.
With regard to its mantra of defense, DEF has not done too bad of a job. The ETF has a beta of 0.64, indicating that it is less volatile than the S&P 500, and its standard deviation relative to the S&P 500 is low as well. That means DEF does deliver on its promise of being a defensive position.
Best ETFs for the Winter: Vanguard Dividend Appreciation Index ETF (VIG)
Dividends remain one of most ideal ways to help cushion downturns and get through sideways-moving markets. Making a few percentage points in yield can mean the difference between a loss and gain at the end of the day.
More importantly, reinvested dividends can propel an overall position that much higher as prices rebound.
All of these factors makes the Vanguard Dividend Appreciation Index ETF (VIG) one of the best ETFs around for playing defense.
The difference — and a major win for VIG — is that it doesn’t focus solely on high yield. Instead, the ETF looks at stocks that have a history of increasing dividends for at least 10 consecutive years. These “dividend achievers” have what it takes to get through all sorts of market environments.
As for yield, VIG currently has an SEC yield of just 2.34%. While that’s not as high as other dividend-focused ETFs, the point is that the yield continues to grow over time as its holdings pay out more cash.
Best ETFs for the Winter: iShares Short Maturity Bond ETF (NEAR)
Given just how crazy the markets have been lately, there’s nothing wrong with taking some money off the table and moving into cash.
Parking some gains while waiting for more bargains is a good strategy in most markets. And considering that interest rates could rise any day now, this cash could be worth even more tomorrow.
The problem is, cash is still earning a big, fat goose egg. So, the secret is to go slightly out on the yield curve — ultra-short-duration bonds invested in securities with maturities of 180 days to 1.5 years. Think of it as cash with a little more “oomph.”
Investors are treated to a slightly higher yield, but still get plenty of interest-rate protection.
One of the best ETFs to play that sector is the $1.6 billion iShares Short Maturity Bond ETF (NEAR).
NEAR is actively managed and tilts its portfolio toward the corporate sector, with bonds and commercial paper issued by financial, industrial and utility stocks being its major holdings.
As such, the ETF has a SEC 30-day yield of 0.98%. That’s much better than the average money market fund or savings account. Meanwhile, NEAR is pretty liquid and has held steady since its inception. That gives it very “cash-like” qualities.
Best ETFs for the Winter: PowerShares Preferred ETF (PGX)
In times like these, you want protection but also want some ability for growth.The answer is to find a bond/stock-like security that can deliver on both grounds.
Preferred stocks are just that security.
Offering high yields but still some chance for price appreciation, preferreds are an ideal way to play wonky markets.
The $2.8 billion PowerShares Preferred ETF (PGX) is one of the oldest and best ETFs to play the sector. The ETF tracks the BofA Merrill Lynch Core Plus Fixed Rate Preferred Securities Index, which is a measure of investment-grade preferred shares.
Financial firms dominate the ETF’s holdings at 87% of assets. However, that’s to be expected as banks, insurance firms, REITs and other financial firms are the largest issuers of preferred shares.
The real win for PGX comes from its SEC 30-day yield of 5.95%. That high yield and relatively stable share price — individual preferred shares generally trade for just below their callable par values — make it an ideal place to “coupon clip” and wait out the market.
As an added bonus, PGX pays a monthly dividend.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.