Even as the S&P 500 continues to set new all-time highs, there are some warning signs emerging. The labor market is showing signs of stagnating, inflation shot much higher in March, and the Iran war is hanging a cloud of uncertainty over everything.
Corporate earnings are still likely to show solid growth in the coming quarters, but a weakening economic foundation could reverse that quickly. This puts the equity markets in a potentially vulnerable spot where equities could fall sharply and quickly.
Most investors have a significant percentage of their portfolios in tech stocks. Even investments in the S&P 500, which are considered diversified, have more than 30% of assets dedicated to the sector. That kind of growth tilt can be a hazard in a market where investors look to take risk off the table.
That’s why considering investments that are designed to provide some level of protection is timely. Each of these three Vanguard ETFs has some key characteristic designed to help shield you from the next market crash.
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Key takeaways
- Investors can choose a number of different paths to protect their portfolios during bear markets.
- Slowing job growth suggests that companies see demand slowing and are managing costs accordingly.
- During the 2022 bear market, the Vanguard S&P 500 ETF fell about 19%. Healthcare and dividend stocks held up much better.
- With the inflation rate hitting 3.3% in March, Treasury inflation-protected securities (TIPS) could be a wise choice now.
1. Vanguard High Dividend Yield ETF
Dividend stocks are considered more defensive because companies are likely at a more mature, established stage in their life cycle, and they’re generating the necessary cash flow to support regular, ongoing shareholder payments.
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The Vanguard High Dividend Yield ETF (VYM 0.17%) takes a more generic approach to high-yield investing by simply selecting the top 50% of yields from a broad equity universe. This combination of diversification and targeting more value-oriented stocks generally ends up doing relatively well in a down market.
2. Vanguard Health Care ETF
Healthcare stocks are considered one of the more recession-proof sectors of the market. Consumers can cut back spending on a lot of things, but they usually keep spending on healthcare regardless of the economic environment.
The Vanguard Health Care ETF (VHT 0.10%) invests in a broad array of companies focused on healthcare products, services, technology, or equipment. These healthcare stocks may not necessarily generate positive returns in a market downturn, but they’re likely to hold up better with this consistent revenue stream.
3. Vanguard Short-Term TIPS ETF
Inflation has been a problem for the U.S. economy since the COVID-19 pandemic. Now, the Iran war is heating it back up again. Inflation traditionally accelerates market downturns, so it makes sense to have at least part of your portfolio dedicated to protecting against it.
The Vanguard Short-Term TIPS ETF (VTIP +0.14%) invests in Treasuries that adjust in value along with the rate of inflation. This helps keep consumers’ purchasing power intact regardless of how fast prices are rising.
Vanguard ETFs: Key facts and metrics
| ETF | Ticker | Expense Ratio | Dividend Yield | AUM | Defensive Role |
|---|---|---|---|---|---|
| Vanguard High Dividend Yield ETF | VYM | 0.04% | 2.4% | $76B | Low beta; value tilt |
| Vanguard Health Care ETF | VHT | 0.09% | 1.4% | $16B | Recession-resistant sector |
| Vanguard Short-Term TIPS ETF | VTIP | 0.03% | 0.6% | $18B | Inflation hedge |
Data source: Vanguard fund websites.
These ETFs and their strategies have a demonstrated history of performing better during bear markets. Each of them, however, approaches it differently. One invests in cash-rich companies that likely have the financial means to weather a downturn. One invests in a sector that consumers usually spend money on no matter what. And one protects against a factor that is often a root cause of economic downturns.
Thinking about how to protect your portfolio principal is always a good exercise, but especially so if you feel that a potential bear market is a real risk. These three Vanguard ETFs would be a great starting point.
