While the markets are experiencing a summer rebound — the S&P 500 and Dow Jones Industrial Average in July had their largest monthly gains since 2020 — it’s never a bad idea to consider safe exchange-traded funds (ETFs) for a portion of your entire investment portfolio.
How much you commit to safe ETFs depends on your risk tolerance. Also, what you consider to be safe is very subjective. Some investors might consider S&P 500 index ETFs to be a safe holding. Others might consider ETFs guaranteed by the federal government, such as Treasury inflation-protected securities (TIPS), as safe investments.
For this article, I’m going to assume that if you’re genuinely looking for safe ETFs to buy, you’re interested in something slightly less risky than the S&P 500. That could possibly include a fixed-income ETF or something a little less aggressive.
To qualify for inclusion as one of the three ETFs to buy now for safety, I identified two main criteria. These ETFs are all up year-to-date (YTD) and possess a five-year annual total return of at least 9%.
Better safe than sorry.
| XLU | Utilities Select Sector SPDR Fund | $75.20 |
| PPA | Invesco Aerospace & Defense ETF | $74.82 |
| RHS | Invesco S&P 500 Equal Weight Consumer Staples ETF | $171.48 |
Safe ETFs: Utilities Select Sector SPDR ETF (XLU)
The Utilities Select Sector SPDR ETF (NYSEARCA:XLU) tracks the performance of the Utilities Select Sector Index, a collection of utilities found in the S&P 500.
The index and fund have 29 holdings, with the top 10 accounting for 62.7% of the ETF’s $16.8 billion total net assets. The top holding is NextEra Energy (NYSE:NEE) at 16.5%.
In November 2016, I suggested that NextEra was an excellent stock because of its big push into renewable energy. As far back as January 2017, I thought NEE was an excellent long-term buy. Since January 2017, NEE is up 187%, more than 100% better than the S&P 500.
Morningstar gives XLU a four-star rating over a five-year and 10-year period. It also gives a five-star rating over three years. Its total return YTD is 5.07%. Over the past five years, it has an annualized total return of 10.22%.
From a safety perspective, XLU has had only one year of negative returns since 2012 — it was down 4.91% in 2015 — a true sign of consistent, if not spectacular, returns. Of all the sectors, utilities are the most conservative because of the very nature of the business. Profits grow based on the utility’s rate base, defined as its total assets less depreciation.
Invesco Aerospace & Defense ETF (PPA)
It seems like there is always a war going on somewhere in the world. It’s a cynical view, perhaps, but defense companies continue to financially benefit from ongoing geopolitical conflicts.
As an example, the Russian invasion of Ukraine is generating increased revenues for various companies in the defense sector. Recently, Javelin missiles have been supplied to the Ukrainian military. Those are made by a joint venture co-owned by Raytheon Technologies (NYSE:RTX) and Lockheed Martin (NYSE:LMT).
The Invesco Aerospace & Defense ETF (NYSEARCA:PPA) tracks the performance of the Spade Defense Index. The index, according to Invesco’s website, “is designed to identify a group of companies involved in the development, manufacturing, operations and support of US defense, homeland security and aerospace operations.”
PPA currently has 57 holdings. Lockheed Martin and Raytheon are the fourth-largest and fifth-largest holdings at 6.4% and 6.17%, respectively. The largest is Boeing (NYSE:BA) at 7.46%. The index uses a modified market capitalization-weighted methodology for constructing its portfolio.
The fund and index are reconstituted and rebalanced quarterly.
Over the past five years, PPA has had an annualized total return of 10.25%. YTD, it’s up 3.89%. Its only down year since 2012 was 2018, when it lost 7.5%.
Safe ETFs: Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS)
When investors think about defensive stocks, the consumer staples sector is more often than not the one we consider. Cereal makers — along with many other food companies — will never run out of people to sell to. People aren’t going to stop eating and drinking.
The Invesco S&P 500 Equal Weight Consumer Staples ETF (NYSEARCA:RHS) invests in consumer staples stocks tracked by the S&P 500, and it’s an equal-weight ETF. That means each holding starts each quarter with the same weighting.
The ETF currently has 34 holdings invested in its $642 million in total net assets. Its three top holdings at present are Lamb Weston Holdings (NYSE:LW) at 3.47%, Costco Wholesale (NASDAQ:COST) at 3.37% and General Mills (NASDAQ:GIS) at 3.28%.
Characteristics of the fund include a forward price-to-earnings ratio of 19.12, a price-to-book of 3.76 and a return on equity of 48.3%. So you’re getting companies that know how to deliver for their shareholders.
The ETF’s performance since 2012 has delivered seven out of 10 years with an annual return greater than 10%. In 2013 and 2019, its annual total return exceeded 20%. YTD, it’s up a little over 1%.
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.
