Before one selects the best funds for conservative investors, it’s important to understand what makes a conservative investor different from the rest of us.
The TSI Wealth Network’s definition suggests, “[A] conservative investor is someone who builds a stock portfolio with the goal of achieving steady returns, including dividends, while maintaining a lower level of risk.”
That’s a lot to unpack.
By this definition, the best funds for conservative investors would be dividend-focused ETFs. That’s not essential but important. The second characteristic conservative investors display is a penchant for investments that deliver steady, if not spectacular, returns. Finally, they like to achieve these returns with a lower level of risk.
Therefore, in my quest for the seven best funds for conservative investors, I will look primarily for ETFs that pay dividends, have low betas and have delivered excellent long-term risk-adjusted returns.
|GLD||SPDR Gold Shares||$160.67|
Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF
|PGX||Invesco Preferred ETF||$12.81|
|AOK||iShares Core Conservative Allocation ETF||$35.12|
|XLP||Consumer Staples Select Sector SPDR Fund||$73.20|
|VPU||Vanguard Utilities ETF||$151.21|
|QYLD||Global X NASDAQ 100 Covered Call ETF||$18.18|
SPDR Gold Shares (GLD)
If the size is important to conservative investors, SPDR Gold Shares (NYSEARCA:GLD) should be on their list with $56.8 billion in total assets. It’s not only the 17th-largest U.S.-listed ETF, but it’s also the biggest gold bullion ETF. It holds the real thing.
If you’re looking for an asset that acts as a store of value, gold is it. It’s often described as a hedge against inflation. We are currently experiencing record inflation.
According to Sprott, a big player in the gold business, in 1930, 1/100th of an ounce of gold could buy you 2.3 loaves of bread, while $1 got you 11 loaves. Today, 1/100th of an ounce buys you 8.6 loaves compared to just half a loaf for $1.
Preservation of buying power is equally important as the preservation of capital. SPDR Gold Shares gives you this. In one form or another, it probably should be among the best funds for conservative investors in every investor’s portfolio.
Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (SRVR)
I’ve long been a fan of Pacer’s Cash Cow ETFs. However, in this instance, I believe the Pacer Benchmark Data & Infrastructure Real Estate SCTR ETF (NYSEARCA:SRVR) makes complete sense for conservative investors. Others must agree with me. It has more than $1.1 billion in total net assets.
The ETF tracks the performance of the Kelly Data Center & Tech Index. The index takes companies generating at least 85% of their revenues from real estate and screens for businesses involved in data and infrastructure real estate.
In terms of size, the qualifying stocks have a minimum market capitalization of $500 million and a daily traded volume of 10,000 shares.
The index is reconstituted and rebalanced four times a year in March, June, September and December. No single holding can exceed 15%, and the number of holdings with a 4.5% weighting or more outstanding can’t exceed 45% of the portfolio.
SRVR currently has 24 holdings. The top three by weight are American Tower (NYSE:AMT), Equinix (NASDAQ:EQIX) and Crown Castle International (NYSE:CCI). They account for 45.6% of its total net assets.
Over the past three years, its annualized total return was 5.83%, 246 basis points higher than the real estate category. Morningstar.com gives it five stars for its three-year risk-adjusted returns.
Invesco Preferred ETF (PGX)
Invesco Preferred ETF (NYSEARCA:PGX) currently yields 5.73%. The ETF tracks the performance of the ICE BofAML Core Plus Fixed Rate Preferred Securities Index. The index is composed of fixed-rate U.S. dollar-denominated U.S.-listed preferred securities. It currently has 298 holdings.
Preferred shares are considered hybrid securities because they have elements of bonds and equities.
For example, if a company is liquidated and funds are left over after debts are repaid, the preferred shareholders would be paid before the common shareholders. Secondly, it gets preferential treatment on dividends. Common shareholders can’t get paid without preferred shareholders also getting their rightful share. These are characteristics similar to bonds.
However, if a company decides to halt all dividends, preferred shareholders are out of luck, just like the common shareholders.
PGX got its start in January 2008. It has $5.5 billion in total net assets. The effective duration of the average holding is 5.32 years. The weighted average coupon rate is 5.47%. The fund is reconstituted and rebalanced monthly.
Over the past 10 years, PGX has had just two years of negative returns — -4.0% in 2018 and -2.39% in 2013 — with four years of positive double-digit annual returns.
iShares Core Conservative Allocation ETF (AOK)
If you buy shares of the iShares Core Conservative Allocation ETF (NYSEARCA:AOK), you get a diversified core portfolio based on conservative risk considerations that charge just 0.15% annually. It tracks the performance of the S&P Target Risk Conservative Index.
AOK is what is referred to as a fund of funds. It currently holds seven iShares ETFs and a small amount of cash. Because it takes a conservative slant, the largest ETF holding is the iShares Core Total USD Bond Market ETF (NASDAQ:IUSB) with a 61.11% weighting.
The fixed income portion of AOK accounts for 70.83% of the $973.8 million in total net assets. Equities (27.86%) and cash (1.31%) account for the rest.
The ETF’s top three geographic regions by weighting are the U.S. (67.68%), China (3.75%), and Japan (3.39%).
AOK currently yields 2.0%.
Consumer Staples Select Sector SPDR Fund (XLP)
The Consumer Staples Select Sector SPDR Fund (NYSEARCA:XLP) tracks the performance of the Consumer Staples Select Sector Index.
The index represents the consumer staples stocks in the S&P 500. The ETF currently consists of 33 consumer staples stocks. As it is market cap-weighted, the largest weighting is Procter & Gamble (NYSE:PG) at 15.47%, while the smallest weighting is Campbell Soup (NYSE:CPB) at 0.51%.
XLP’s top 10 holdings account for 70% of the fund’s $15.0 billion in total net assets. Its turnover is a measly 4%. This means that it turns the entire portfolio once every 25 years. The average market cap of the 33 stocks held is almost $119 billion.
The typical stock in the portfolio currently trades at 1.5x sales, grows its earnings at 6.5% per year, and has a 2.69% dividend yield.
Year-to-date, XLP has a total return of -4.74%, about one-quarter of the decline of the entire U.S. market, which is down more than 20% in 2022.
Vanguard Utilities ETF (VPU)
The Vanguard Utilities ETF (NYSEARCA:VPU) tracks the performance of the MSCI US Investable Market Index (IMI) Utilities Index.
The index represents companies of all sizes that are considered part of the utility sector according to the Global Industry Classification Standard (GICS).
The largest company in the index has a $152.0 billion market cap. The smallest is $290.9 million while the median is $8.1 billion.
VPU has $6.0 billion in total net assets. The top 10 holdings account for 54% of the total. It currently holds 65 stocks, one more than the index. Electric utilities account for almost 60% of the portfolio. Utilities with more than one kind of power represent another 28.0%. Water, renewables, and gas make up the remainder.
The top three holdings by weight are NextEra Energy (NYSE:NEE) at 12.41%, Duke Energy (NYSE:DUK) at 7.23%, and Southern Co. (NYSE:SO) at 6.70%.
It currently yields 2.89%.
Global X NASDAQ 100 Covered Call ETF (QYLD)
Global X NASDAQ 100 Covered Call ETF (NASDAQ:QYLD), as the name suggests, generates additional income from writing covered calls on the Nasdaq 100 constituents. This involves buying all the Nasdaq 100 stocks and selling call options on the index.
How has it performed?
In 2022, the Invesco NASDAQ 100 ETF (NASDAQ:QQQM) has an annualized total return of -27.78%. QYLD’s YTD performance is -15.05%, considerably better than QQQM. It is due, in large part, to the covered call income.
QYLD tracks the performance of the Cboe Nasdaq-100 BuyWrite V2 Index. The ETF has a current yield of 15.82%.
As you might be aware, the Nasdaq 100 are the top non-financial stocks trading on the Nasdaq. As a result, over 50% of the ETF is invested in tech stocks, with double-digit weightings in the communication services and consumer discretionary sectors.
The ETF’s top 10 holdings account for 47% of its $6.76 billion in total net assets. Its three top holdings are Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), and Amazon.com (NASDAQ:AMZN).
QYLD is an excellent way for a conservative investor to play both offense and defense regarding their investment strategy.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.