With seasonal volatility, rising interest rates, uncertainty over a tariff war with China and fast-approaching mid-term elections all on the minds of investors, the best ETFs to buy now are those that invest in defensive areas of the market.
October has historically been a period of volatility. But with no fiscal or monetary stimulus and plenty for investors to worry about now, the market could be setting up for a sustained period of weakness.
Although it’s not wise to completely jump out of your core equity holdings, now can be a good time to add exposure to areas of the market that can hold up or even produce gains in volatile conditions. Some of these areas include sectors like healthcare, consumer staples, utilities and alternative assets, such as gold.
To protect your portfolio against volatility and downside pressure, we highlight seven of the best ETFs to buy for defensive stocks.
Health Care Select Sector SPDR (XLV)
Buying stocks in the healthcare sector is a classic defensive play, and the Health Care Select Sector SPDR (NYSEARCA:XLV) is one of the best healthcare ETFs on the market.
XLV tracks the Health Care Select Sector Index, which includes 63 large-cap U.S. health stocks like Johnson & Johnson (NYSE:JNJ), Pfizer (NYSE:PFE) and UnitedHealth Group (NYSE:UNH). More that three-fourths of the portfolio consists of stocks of companies in the health sub-sectors of pharmaceuticals; health care providers and services; and health care equipment and supplies. Less than 20% of the fund holds bio-tech stocks.
With heavy exposure to quality health stocks and less focus on the more volatile areas like bio-technology, XLV makes for an outstanding defensive option among these ETFs to buy.
Consumer Staples Select Sector SPDR (XLP)
If you want low-cost, diversified exposure to a wide range of consumer non-discretionary stocks, the Consumer Staples Select Sector SPDR ETF (NYSEARCA:XLP) will get the job done.
When the economy slows, consumers still purchase everyday goods such as food, beverages and toiletries. It may not be as sexy as the tech sector, but consumer staples, aka consumer non-discretionary, is a sector that tends to hold up better during downturns than its riskier counterparts.
The XLP fund tracks the Consumer Staples Select Sector Index, which consists of 32 U.S. stocks in the consumer staples sector, such as top holdings Proctor & Gamble (NYSE:PG), Coca-Cola (NYSE:KO) and Pepsico (NYSE:PEP).
Utilities Select Sector SPDR (XLU)
The utilities sector is another classic defensive play, and Utilities Select Sector SPDR (NYSEARCA:XLU) is arguably the best ETF to buy to get low-cost exposure to the sector.
Utilities companies provide services to consumers that are used for daily living, such as water, electric, telephone and natural gas services. This sector, like consumer staples, is defensive because these services are still purchased even in the depths of economic recession.
XLU provides investors with broad exposure to the utilities sector as it tracks the Utilities Select Sector Index, which consists of 29 U.S. stocks. Top holdings include big utilities names like NextEra Energy (NYSE:NEE), Duke Energy (NYSE:DUK), and Dominion Energy (NYSE:D).
Invesco Defensive Equity (DEF)
Rather than buying individual sectors, you can get exposure to multiple defensive sectors with the Invesco Defensive Equity ETF (NYSEARCA:DEF).
One of the few ETFs to receive a five-star rating, DEF has the unique quality of combining a defensive strategy while still accomplishing solid returns. Although defensive stocks generally outperform the broad market during downturns, they typically fall behind when the market is strong.
Since inception (Dec. 15, 2006), through Monday, DEF put up an annualized return of 8.2%, while the S&P 500 just edged it out at 8.5%. This is impressive, considering the lower market risk for defensive stocks.
Invesco Preferred ETF (PGX)
Preferred stocks generally have lower market risk than common stocks, which makes Invesco Preferred ETF (NYSEARCA:PGX) a smart choice among the sea of ETFs to buy for a defensive move when the market is in risk-off mode.
A bonus for dividend investors looking for income from their investments, PGX has an impressive 12-month yield of 5.7%. Combine this with a 10-year annualized return of 8.6% and you have a solid defensive fund that can also play offense at the same time by getting top-notch returns.
PGX tracks the ICE BofAML Core Plus Fixed Rate Index, which consists of a basket of fixed-rate U.S.-dollar-denominated preferred securities. that makes it among the best ETFs to buy.
SPDR Gold Shares (GLD)
When volatility and uncertainty abound, investors turn to the certainty of physical assets, and SPDR Gold Shares (NYSEARCA:GLD) is an outstanding fund to take advantage of this historical trend.
The price of gold has a low correlation with stock prices, which means that a down market for stocks can often coincide with a positive environment for funds that track the precious metal value.
GLD does not hold physical gold, nor does it hold shares of gold mining companies; the ETF tracks the price of gold bullion. And as an added bonus for investors seeking exposure to gold, GLD is a large, liquid fund with assets of $29 billion.
iShares Core U.S. Aggregate Bond (AGG)
Getting defensive is about diversifying with assets that have low correlation with stocks, and you can do this with a broad bond index fund like iShares Core U.S. Aggregate Bond (NYSEARCA:AGG).
Although interest rates have been rising, which means bond prices have been generally falling, bonds are still a great diversification tool, especially to defend your portfolio during a correction in stock prices. And looking at bond ETFs to buy is a great way to weather the volatility.
During corrections, no matter the size or duration, investors tend to sell out of the riskiest assets and buy more of the assets with lower market risk, such as bonds. A great way to get cheap and broad exposure to the bond market is with AGG. This fixed income ETF tracks the Barclay’s Aggregate Bond Index, which covers the entire U.S. bond market of nearly 7,000 bonds.
As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities, although he holds XLV, XLP, XLU, GLD and AGG in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.