The current dynamics playing out in the stock market are really difficult to describe right now. On the one hand, there are sectors of the economy that are red hot, with hundreds of billions of dollars flowing into powerful growth trends like AI that are clearly propping up valuations across the board.
The Vanguard Utilities ETF (VPU) provides defensive exposure with between one-third and one-half of the returns coming from dividends.
The iShares 20 Plus Year Treasury Bond ETF (TLT) offers a 4.3% yield and a hedge against stock market corrections.
The Vanguard FTSE Developed Markets ETF (VEA) provides exposure to developed markets outside the US with an expense ratio of 0.03%.
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On the other hand, the vast majority of stocks in the broader market may already be in bear market territory. This is representative of a weakened consumer and the view that valuations may have become too distorted in the post-pandemic era.
Forget stocks, other asset classes, like real estate, could be more overvalued right now compared to current interest rates. And while I hope interest rates go down, there are also risks with bonds and other major securities, leaving few seemingly good options for parking some capital right now.
For those thinking about how to navigate this market, here are three main options to consider right now. In this article I will focus on three exchange-traded funds (ETFs) as ways to play the market, as these holdings should provide a solid advantage for both passive and active investors.
There is perhaps no more defensive sector in the market right now than utilities, and the Vanguard Utilities ETF (VPU) remains my top ETF pick for long-term investors looking to take advantage of these trends over time.
Sure, there are many growth advantages within the utilities sector that could be explored in their own dedicated article. But I think it’s important to consider the relative value that comes from having between a third and half of this sector’s returns come from dividends.
Utilities tend to be mature entities that benefit from very sustainable underlying cash flow growth profiles. Regulators have to approve price increases over long periods of time, giving investors assurances that they will receive their money. The capital-intensive nature of this industry has provided such fundamentals, and that is one of the most attractive aspects of this particular sector that is worth considering.
Instead of buying a single stock or a group of utility stocks, I prefer to follow this trend through VPU. For this reason, it is one of the largest ETF holdings in my portfolio, generating around 2.6% returns right now with an expense ratio of 0.09%. Those are fundamentals that I like.
I still think that bonds represent a unique opportunity for investors today, and the iShares 20+ Year Treasury Bond ETF (TLT) is, in my opinion, one of the best options for investors looking for portfolio protection.
I continue to take the view that interest rates will trend downward over time, if not just for the fact that governments around the world that hold US debt will not want to see the value of their holdings fall (and the US government will not want higher interest rates either, which increases its debt servicing costs).
With long-term trends of lower interest rates coming into question due to the spike in inflation in recent years, this may be a choppy bet. But if stocks start to fall significantly in a correction or bear market situation, TLT is an ETF that could outperform the rest.
The ability of investors to hedge their interest rate-sensitive exposure and bet on lower long-term rates in an ETF is impressive. With a current dividend yield of 4.3% and an expense ratio of 0.15%, TLT is one of the best options for long-term investors right now.
Last, but certainly not least on this list of defensive ETF options that investors should consider is the Vanguard FTSE Developed Markets ETF (SEE).
For some years I have thought that US stocks are vastly overvalued, compared to their own historical indicators. However, compared to the rest of the world, this valuation divergence is even more notable.
What VEA does is allow investors looking to expand their geographic concentration in the US market to other high-quality developed markets to do so. By investing in key markets in Europe and Asia (such as Japan), VEA does not provide the exposure to higher risk emerging markets that may put off some investors. Rather, this fund seeks to purchase representative non-U.S. securities in the world’s most stable and high-quality markets.
With a dividend yield of 2.8% (much higher than almost any index fund that tracks US stocks) and a rock-bottom expense ratio of 0.03%, I don’t see what’s wrong with having some VEA and diversifying some of the geographic risk associated with being all-in on one stock market. Those who think long term can supplement US exposure with such an ETF and sleep much better at night. At the end of the day, I think that’s the most valuable thing that VEA and the other two picks on this list offer.
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