Exchange-traded funds (ETFs) have many advantages for investors. Funds that track a particular sector of the economy or a specific stock index provide a lot of diversification to investors. ETFs can also deliver strong, sustained returns at affordable prices and with low fees. Many ETFs also provide quarterly or annual dividend payments. For investors who don’t feel confident picking individual stocks, ETFs can be a great way to get exposure to a basket of well-known stocks while balancing risk.

With stock markets remaining choppy and many assets such as cryptocurrencies moving in extremely volatile ways, investors may want to consider using ETFs to take defensive positions with their portfolio. In this article, we look at four of the best ETFs to protect your portfolio as we head into the second half of 2021.

Here are my picks for the best defensive ETFs:

• Vanguard 500 Index Fund ETF (NYSEARCA:VOO)
• SPDR Retail ETF (NYSEARCA:XRT)
• iShares Gold Trust (NYSEARCA:IAU)
• Vanguard FTSE Europe ETF (NYSEARCA:VGK)

Best Defensive ETFs to Protect Your Portfolio: Vanguard 500 Index Fund ETF (VOO)

Most experts seem to agree that an exchange-traded fund that tracks the S&P 500 stock market index is all the average investor needs to achieve decent returns and grow their money over the long-term.

Among ETFs that track stock market indexes, the S&P 500, which is comprised of the 500 largest companies listed on stock exchanges in the U.S., provides the most diversification. Investors get exposure to large, mid-sized and small-capitalized companies across a broad range of economic sectors — technology, airlines, industrials, retail, energy, automotive, and so on.

And among ETFs that track the S&P 500, Vanguard’s 500 Index Fund gets my vote. The VOO ETF offers among the lowest fees at 0.03%, compared to the average fee charged on other S&P 500 ETFs of 0.83%.

Top holdings in the Vanguard 500 Index Fund include Apple (NASDAQ:AAPL), Berkshire Hathaway (NYSE:BRK-A, NYSE:BRK-B), JPMorgan Chase (NYSE:JPM) and Johnson & Johnson (NYSE:JNJ). The fund currently has total assets approaching $750 billion and has delivered an average annual return of 15.68% since its inception in 2010.

That’s a strong performance through good times and bad over more than a decade.

SPDR Retail ETF (XRT)

If there’s one sector of the economy you can count on to remain buoyant throughout the second half of 2021, it is retail. Online sales remain strong and they are now being complemented by in-person shopping as Covid-19 restrictions are lifted and people again return to stores and shopping malls.

Retailers of all kinds, both mom and pop operations and big box chains, are likely to do brisk business throughout the summer and fall leading up to the peak holiday shopping season that ends the year. So why not invest some money in an ETF that tracks the retail sector?

State Street Global Advisors SPDR Retail ETF does the trick. The fund covers a nice cross section of the U.S. retail landscape. Top holdings in the XRT ETF include Dillard’s (NYSE:DDS), Ambercrombie & Fitch (NYSE:ANF), Dick’s Sporting Goods (NYSE:DKS), Target (NYSE:TGT) and Overstock.com (NASDAQ:OSTK), to name only a few stocks.

Since its inception in 2006, the SPDR Retail ETF has delivered an average annual return of 13.09%. Over the past decade, the annual return has averaged 14.86%.

The fee charged is 0.35%. However, this ETF pays an annual dividend at a yield of 0.67%. Not too shabby.

Best Defensive ETFs to Protect Your Portfolio: iShares Gold Trust (IAU)

Gold hasn’t been replaced as a reserve holding or safe haven for investors. Not yet anyway. For all the talk of cryptocurrencies replacing gold, the reality is that digital coins and tokens such as Bitcoin (CCC:BTC-USD) and Ethereum (CCC:ETH-USD) remain extremely volatile while gold continues to be steady as a rock.

And gold remains relatively inexpensive currently at about 10% below the all-time high the commodity reached in August 2020. Some analysts see a rebound in gold prices this year, especially if the current stock market volatility persists.

The iShares Gold Trust allows investors to track the day-to-day movements of the price of gold bullion. As gold prices rise and fall, so too does the price of the IAU ETF.

Since its inception in 2016, the iShares Gold Trust has delivered an average annual return of 8.55%. Its administrative/sponsor fee is relatively cheap at just 0.25% and the current price per share is also affordable at just $35.78. If stock markets remain choppy or we end up in a correction in this year’s second half, investors might want to get defensive with this gold ETF.

Vanguard FTSE Europe ETF (VGK)

A good way to get defensive is to diversify your portfolio, and one of the best diversification strategies is to invest abroad. Why not Europe? European markets are currently near all-time highs and sectors ranging from retail to automotive are rebounding as countries from the United Kingdom to Germany and Switzerland ease their pandemic restrictions and reopen.

One of the best stock markets to track in Europe is the Financial Times Stock Exchange 100, or FTSE 100, which is comprised of highly capitalized blue-chip stocks listed on the London Stock Exchange.

The Vanguard FTSE Europe ETF is a great way to gain exposure to large cap, blue-chip stocks trading in London, England and includes names such as Nestle (OTCMKTS:NSRGY), SAP (NYSE:SAP), Royal Dutch Shell (OTCMKTS:RYDAF) and HSBC Holdings (NYSE:HSBC), among many others.

Since it was founded in 2005, the ETF has delivered an average annual return of 5.65%. Over the past five years, the average annual return has been 10.24%. As with all Vanguard funds, the FTSE Europe ETF’s fees are low at just 0.08%. And this ETF pays a quarterly dividend of 27 cents per share. There are worse ways to diversify a portfolio. 

On the date of publication, Joel Baglole held a long position in AAPL. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Joel Baglole has been a business journalist for 20 years. He spent five years as a staff reporter at The Wall Street Journal, and has also written for The Washington Post and Toronto Star newspapers, as well as financial websites such as The Motley Fool and Investopedia.