With economic and market headwinds likely in the months ahead, now is a good time to take a close look at some of the best Vanguard ETFs that can shift your portfolio into defensive mode.
Getting defensive with ETFs doesn’t mean you won’t participate in any upside the market has left in it, but it does mean that you can minimize the downside risk facing the market in the coming months:
- Seasonal pressures may keep a lid on stock prices or even push them lower, especially with stock prices not far off historic highs in the second-longest running bull market in history.
- Consumer spending is two-thirds of the economy and consumer confidence fell in May for the second consecutive month, according to the Consumer Confidence Index.
- The market hates uncertainty and the looming U.S. presidential face-off is not likely to produce much in the way of certainty any time soon.
Fortunately, some of the best Vanguard ETFs focus on defensive sectors. But remember, when adding ETFs to a portfolio, do not overload the allocation percentages.
For example, if you added all three of these defensive Vanguard ETFs to your portfolio, you don’t need to allocate more than 5% to 10% to each ETF. Therefore, you’d have 15% to 30% of your portfolio allocated to defensive ETFs.
The following are three of the best Vanguard ETF for defensive investors to choose from.
Best Vanguard ETFs to Get Defensive: Vanguard Consumer Staples ETF (VDC)
Expense Ratio: 0.10%, or $10 for every $10,000 invested
If you’re looking for just one solid Vanguard ETF that is broadly diversified among a variety of defensive industries, the Vanguard Consumer Staples ETF (VDC) is an outstanding choice.
When times get tough, consumers don’t stop buying the staples — products they need for everyday living — like food, medicine and household products. And they won’t likely cut back on the “sin” products like alcoholic beverages and tobacco.
Although consumer staples stocks can see declines in price during a bear market correction, they typically perform better than a broad market index like the S&P 500.
VDC passively tracks the MSCI US Investable Consumer Staples 25/50 index, which means this ETF will give you a pure dose of consumer staples stocks like Procter & Gamble Co (PG), The Coca-Cola Co (KO), and Philip Morris International Inc. (PM).
Best Vanguard ETFs to Get Defensive: Vanguard Utilities ETF (VPU)
Expense Ratio: 0.10%
The utilities sector is a classic defensive play and the Vanguard Utilities ETF (VPU) is among the best ETFs to cover the sector.
Not only are utilities stocks good for building a defensive portfolio, they also tend to pay high dividends. And in a low interest rate environment, where decent yields can be hard to find, investors seeking yield will often buy utilities stocks, mutual funds and ETFs, which pushes their prices higher.
If the U.S. economy keeps softening, the Fed may feel pressured to keep rates lower for longer, which has been the case thus far in 2016 and has helped make utilities stocks among the highest performers in the year.
Thus far in 2016, VPU has already jumped 16% with the help of high-quality large-cap utilities stocks like top holdings Duke Energy Corp (DUK), NextEra Energy Inc (NEE) and Southern Co (SO).
Best Vanguard ETFs to Get Defensive: Vanguard Health Care ETF (VHT)
Expense Ratio: 0.09%
Another classic defensive move is to make a play in the health care sector, and one of the best ETFs to buy for this is the Vanguard Health Care ETF (VHT).
Although health stocks, especially those in the bio-technology sub-sector of health, have been hit with major price declines in 2016, now is a good time to strengthen your portfolio and get into health care stocks at a reasonable price.
VHT tracks the MSCI US IMI Health Care index, which means you’ll get focused exposure the big health stocks like Johnson & Johnson (JNJ), Pfizer Inc. (PFE), and Merck & Co., Inc. (MRK).
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. His No. 1 holding is his privately held investment advisory firm in Hilton Head Island, SC. Under no circumstances does this information represent a recommendation to buy or sell securities.