The first quarter of 2017 looked like it was going to be magical. The S&P 500 rocketed more than 7% higher by early March, and it looked like nothing could get in the way of the various “Trump plays” leading the market higher.
It was a confluence of things. The fourth-quarter earnings season slowed to its close, taking with it the big-pop opportunities across the stock market. The market as a whole had gotten outstandingly overpriced, which dulled investors’ buying spirits. And more and more attention was paid to President Donald Trump, Congress and a healthcare bill that quickly seemed doomed to fail amid no Democratic support and a split Republican majority.
While the market finished well more than 5% higher for the quarter, it gained no ground in March, and did so in herky-jerky fashion. Now, Wall Street is threatening to enter the second quarter amid uncertainty, volatility … and mired in a funk.
So, what should your strategy be heading into the rest of the year?
I, for one, like exchange-traded funds (ETFs) much better than stocks right now simply because their diversity might not prevent losses as a whole, but they’ll minimize the damage from any precipitous plunges in individual equities. And because volatility looks to be settling in, you should definitely take a defensive tack — the picks today emphasize that over all else.
Here’s my look at the 10 best ETFs to buy right now for this suddenly unstable market.
PowerShares S&P 500 High Dividend Low Volatility Portfolio (SPHD)
Type: Low-Volatility Dividend
The low-volatility theme is one of the growing areas of the ETF market, which is funny only because investors really haven’t had a need in months. But now, expect low-vol products to get more love as the market looks unsure of itself, and people seek out safety.
Many low-vol ETFs sport chintzy dividends, however, which is why I like the PowerShares S&P 500 High Dividend Low Volatility Portfolio (NYSEARCA:SPHD).
The SPHD is a collection of S&P 500 companies that have been filtered down to a group of 50 high-income stocks that have traded with the least volatility over the past 12 months. The result is a batch of pretty stable companies that also happen to yield more than 3% as a group — not a huge yield by any means, but very good compared to low-vol products, and even many blue-chip ETFs that focus on dividends.
You’ll be unsurprised to find a number of utility stocks in the portfolio, but there are even companies like storage REIT Iron Mountain Inc (NYSE:IRM) and futures exchange operator CME Group Inc (NASDAQ:CME).
What also stands out about SPHD is that while it’s defensive in nature, it still performs admirably in up markets, too.
You can read more about SPHD at PowerShares’ provider site.
iShares Edge MSCI Min Vol Global ETF (ACWV)
Type: Global Low-Volatility
Expenses: 0.2% (includes 12-basis point fee waiver)
You can also take the idea of low volatility to the extreme by also mashing in a dose of global diversification via the iShares Edge MSCI Min Vol Global ETF (NYSEARCA:ACWV).
Like SPHD, ACWV seeks out companies that have lower volatility characteristics compared to their peers — it just does so across the globe rather than just in the U.S.
However, investors would be wise to remember the difference between “global” and “international” when it comes to ETF monikers. That is, “international” typically means “world ex-U.S.,” while “global” means “world including U.S.” Thus, the U.S. still makes up a hefty 57% of this fund — and top holdings are dominated by American stocks such as Johnson & Johnson (NYSE:JNJ), Automatic Data Processing (NASDAQ:ADP) and Procter & Gamble Co (NYSE:PG). However, you also get exposure to big, developed markets such as Japan (13%) and Switzerland (4%), as well as emerging countries such as China (5%) and Indonesia 5%.
The lack of dividend focus results in a lower yield of about 2%, which is on par with the S&P 500. But if you’re looking to maintain exposure to the safest U.S. stocks with a hedge toward stable international players, ACWV is a solid hideout spot.
You can read more about ACWV at iShares’ provider site.
Fidelity MSCI Health Care Index (FHLC)
Type: Sector (Healthcare)
The Fidelity MSCI Health Care Index (NYSEARCA:FHLC) is an inexpensive and diverse healthcare fund of 345 stocks across pharma, biotech, healthcare equipment and other industries. That means holdings like JNJ, UnitedHealth Group Inc (NYSE:UNH) and Celgene Corporation (NASDAQ:CELG).
Advocating for FHLC might seem just a touch counterintuitive considering that one of the sparks for Q1’s market malaise was the failure of a healthcare bill … but bear with me.
Healthcare reform was the biggest question mark facing pharmaceutical companies, biotech companies and the like. No one was quite sure what to expect — and no one knew which companies would get the short end of the stick.
Now that the GOP has tried and failed to get the AHCA through, however, healthcare reform appears to be off the table for now — which means business as usual for the time being. And for most of the holdings of the FHLC, that’s a good thing. That might be difficult to grasp considering the big swings lower over the past year-and-a-half, but remember: healthcare stocks were largely worried about a Hillary Clinton win — and were mostly off to the races following Donald Trump’s victory.
It’s time for other sectors to fall under the microscope. Healthcare should go back to its longer-term uptrend for the time being.
You can read more about FHLC at Fidelity’s provider site.
VanEck Vectors Preferred Securities ex Financials ETF (PFXF)
Type: Preferred Stock
Expenses: 0.41% (includes 8-basis point fee waiver)
If you want to hunker down while collecting big yields, look no further than the VanEck Vectors Preferred Securities ex Financials ETF (NYSEARCA:PFXF). This mouthful of an ETF invests in preferred stocks, which are so-called “hybrid” stocks that combine a few attributes of common stocks with a few attributes of bonds.
So, for instance, a preferred stock will trade on an exchange and does represent ownership in a company — just like a common stock. But unlike a common stock, preferred shares typically don’t include voting rights. And a preferred stock will typically pay a fixed (and often high) dividend based on a par rate assigned when the shares are issued — very similar to bonds and their coupon payments.
As a result, preferred stocks tend to yield a lot, but move very little, making them a very safe play in times of tumult.
While a number of ETFs invest in preferred stocks, the PFXF takes the “safety play” angle one step further by excluding the preferreds of financial-sector stocks. The fund came out just a couple years after the financial crisis of 2008-09, so it’s no secret as to why. As banks’ very existence seemed at risk, even their preferreds were clobbered — and the PFXF looks to avoid a similar fate. Thus, holdings tend to include the preferred shares of telecoms like T-Mobile US Inc (NASDAQ:TMUS) and utilities like NextEra Energy Inc (NYSE:NEE).
PFXF also offers one of the highest yields among preferred stock funds, at 5.8%, and has a dirt-cheap 0.41% expense ratio.
You can read more about PFXF at VanEck’s provider site.
iShares 20+ Year Treasury Bond ETF (TLT)
Type: Long-Term Treasury
The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) is a long-term bond fund that holds 35 different U.S. Treasury bonds, the vast majority of which have maturities of 20 or more years.
But … if bond prices go down when yields go higher, why would you want to buy something like the TLT, which is decidedly sensitive to interest-rate changes?
Well, it’s not a perfect relationship.
For one, it’s often the fear of interest-rate hikes that sends bonds and bond funds to the ground. For instance, the TLT fell as much as 4% (by March 13) in the month leading up to the March 15 announcement. Since then, the TLT is actually up nearly 4% — a reversal of the old saying “buy the rumor, sell the news.” Investors sold the possibility, but are now buying the facts.
Also, as long as the market stays volatile and investors fear a crash, that should only help demand for higher-yielding long-term bonds and bond funds due to their relative stability. The TLT doesn’t yield a ton at 2.6%, but it might make more sense to sit on that kind of yield than it will knowing that similar-yielding blue chips like PepsiCo, Inc. (NYSE:PEP, 2.7%) and JPMorgan Chase & Co. (NYSE:JPM, 2.3%) might be taking a bath soon.
You can read more about TLT at iShares’ provider site.
SPDR Nuveen S&P High Yield Municipal Bond ETF (HYMB)
Type: Municipal Bonds
Expenses: 0.45% (includes 5-basis-point fee waiver)
Another bond fund that should be just fine in the current environment is the SPDR Nuveen S&P High Yield Municipal Bond ETF (NYSEARCA:HYMB).
Municipal bonds are another type of government debt — but rather than being backed by the U.S. government, it’s instead backed by states, cities and other municipalities. On the downside, there’s a little bit more risk because states and especially cities and counties aren’t as financially stocked as the federal government. That said, city bankruptcies tend to make big headlines because they’re rare — in other words, you don’t have to worry about munis falling into the ground.
Still, because they’re riskier, you do get a bit more yield for the trouble, which is nice. What’s also appealing is their tax-exempt status — you don’t have to pay federal taxes on municipal bond income, and if you reside in the state or municipality where the bond was issued, you’re exempt from any applicable state or municipal taxes, to boot.
That matters. While HYMB currently offers “just” a 4.5% yield, on a tax-equivalent basis, that’s actually closer to 7%.
You can read more about HYMB at SPDR’s provider site.
Pimco Enhanced Short Maturity Active Exchange-Traded Fund (MINT)
Type: Short-Term Bonds
Expenses: 0.35% (includes 1-basis-point fee waiver)
If you really want to park the bus, the Pimco Enhanced Short Maturity Active Exchange-Traded Fund (NYSEARCA:MINT) has a home where you can keep your assets liquid.
There’s nothing flashy to this one — very little upside potential, and very little income potential, at a current yield just above 1%. The fund’s whole purpose is to simply provide a better total return than money market funds, which themselves are literally just a place to store your cash when the market looks grim.
But manager Jerome M. Schneider has done a good job of protecting investors’ money, keeping the MINT in a range between $101.50 and $100.50 — so, a mere 1% — for the past five years. He does this by holding short-duration investment-grade debt from the likes of Barclays PLC (ADR) (NYSE:BCS) and Verizon Communications Inc. (NYSE:VZ).
You can read more about MINT at Pimco’s provider page.
iShares Core Conservative Allocation ETF (AOK)
Type: Asset Allocation (Conservative)
Expenses: 0.25% (includes 10-basis-point fee waiver)
The iShares Core Conservative Allocation ETF (NYSEARCA:AOK) is one of several funds that act like a portfolio in a box — and in this case, the AOK acts like a conservative portfolio. In a box.
Asset allocation funds typically hold a mix of stocks and bonds (and usually cash) to meet a certain investment strategy. Very simply, more conservative asset allocation funds will hold a lot of bonds and not many stocks — and the stocks they do hold will be more on the value/income end of the spectrum. Aggressive asset allocation funds will still hold bonds, just not as many, and will focus more on growth in the equity part of the portfolio.
AOK is 67% invested in fixed income, 32% in equities and roughly 1% in cash at the moment. It also has some international flavor, with 35% of the fund in overseas markets such as Japan (5%), the U.K. (4%) and Germany (3%). And AOK gets this exposure by investing in a number of iShares funds, including the iShares Core S&P 500 ETF (NYSEARCA:IVV) and the iShares U.S. Credit Bond ETF (NYSEARCA:CRED).
You can read more about AOK at iShares’ provider page.
ProShares Short S&P500 ETF (SH)
Type: Inverse Index
Whether you’re simply worried about hedging your long positions, or you’re straight-up bearish on markets (but not aggressive enough to get into the really kinky ETFs), the ProShares Short S&P500 ETF (NYSE:SH) makes a ton of sense.
This ETF is exactly what it sounds like — it takes an unleveraged short position on the S&P 500. Thus, if the S&P 500 goes down 1%, the SH returns 1% (minus fees, of course).
ProShares’ provider site for SH warns that “due to the compounding of daily returns, ProShares’ returns over periods other than one day will likely differ in amount and possibly direction from the target return for the same period,” but this is boilerplate that applies more to leveraged funds than the SH. The ETF is very faithful to its benchmark, and its chart looks like a mirror image of the SPDR S&P 500 ETF Trust (NYSEARCA:SPY).
SH is typically used as a way to hedge against your long buy-and-hold positions. For instance, if you’re sitting on a number of dividend stocks you plan on holding for a long time, you might panic and sell out now, hoping to lock in your gains and eventually buy back in at cheaper prices. But market timing is a fool’s game for most, and you also lose out on all those additional trading fees and capital gains taxes.
Instead, hold on to your longs, and buy the SH. If the market does dip, it will rise, helping offset some of the losses across the rest of your portfolio.
You can read more about SH at ProShares’ provider page.
iShares Gold Trust (IAU)
Type: Commodity (Gold)
I’m putting this final recommendation last simply to stress the point that I don’t believe gold is a buy-and-hold investment. Its value does not hold up nearly as well over time compared to stocks, in large part because it doesn’t throw off any dividends or coupon payments.
Gold is a trade, and nothing more. Lucky for us, gold is a trade based on fear and volatility — and we’ve got that in spades right now.
The iShares Gold Trust (NYSEARCA:IAU) is not a regular ETF, but instead a trust, which allows the fund provider to hold actual, physical gold. In fact, the price of IAU is 1/100th the value of an ounce of gold. That differs from units of the SPDR Gold Shares (NYSEARCA:GLD), which represent 1/10th the value of an ounce of gold.
Why IAU? Because at 0.25% in expenses, it’s 10 basis points cheaper than the more popular GLD. However, understand that GLD is more popular because it represents a larger investment in gold, which is more price-efficient for institutional traders. For average Joes like you and I, iShares’ IAU makes much more sense.
Again, the IAU is not a buy-and-hold investment in my eyes, but if we’re in for a volatile year — especially as we hit the “sell in May and go away” period — gold could do quite well, and so could IAU.
You can read more about IAU at iShares’ provider page.
Kyle Woodley is the Managing Editor of InvestorPlace.com. As of this writing, he was long SPHD and PFXF. Follow him on Twitter at @KyleWoodley.