Inflation is on the rise. Interest rates are too. Debt for many is soaring. The Iran war shows no end in sight. Many economic indicators point to problems ahead.
Given the signs, it’s easy to think that the next big market crash might not be too far off. But when a crash might happen is impossible to predict, although some investors do try. They take the ill-advised action of moving everything you own to cash and hope that their prediction is right.
The better option is to prepare your portfolio today to help cushion any potential downside risk without significantly altering your long-term asset allocation plans. Let’s look at some exchange-traded funds (ETFs) that can help with that.
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The iShares MSCI USA Quality Factor ETF (QUAL +0.47%) would be my first recommendation. Whenever there’s market uncertainty and volatility, it always helps to own high-quality companies with strong balance sheets that can weather any economic downturn. This ETF does just that.
The iShares MSCI USA Minimum Volatility Factor ETF (USMV +0.17%) offers another approach. Instead of looking at balance sheets, it looks at stock price behavior. Specifically, the fund uses an optimization process designed to produce a portfolio that minimizes overall volatility. As part of its analysis, it considers how individual stocks move together rather than focusing on isolated price swings. That gives it a leg up on funds that just hold a basket of low-volatility stocks.
If you want to go with a more traditional equity hedge, there’s the Vanguard Intermediate-Term Treasury ETF (VGIT -0.19%). Treasuries haven’t had a stellar track record recently, but they’re starting to demonstrate once again the opposing correlation with equities they’re long known for. If a market crash occurs, investors are likely to buy government bonds as a safe haven, which could make this ETF a smart buy.
Regardless of the ETF you choose, it’s always better to choose protection over prediction.
David Dierking has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
