10 Defensive ETFs to Protect Your Portfolio
Want to prevent a further portfolio beating across the rest of 2022? These defensive ETFs can provide some market cover.
It's hard to blame investors for wanting to dive into a safe room following the S&P 500's worst first half of a year since 1970. Fortunately, they can find the protection they seek via defensive exchange-traded funds (ETFs).
Sir John Templeton famously quipped that "the four most expensive words in the English language are 'This time is different.'" But in 2022, it seems almost naive to say that the environment we're in is something that investors have seen before.
U.S. inflation just hit a 40-year high. The Federal Reserve is engaged in the most aggressive monetary policy tightening since the mid-1990s. The war in Ukraine has devastated the nation and unwound existing global supply chains for key commodities. Oh yeah, and there's still the urgent climate crisis we've failed to address with heat waves shattering records yet again in 2022.
It's worth admitting that over the very long term, stocks always recover and move higher. So, one way to get through the current volatility on Wall Street is to simply refuse to look at stock quotes for two or three years and hope things look better on the other side.
However, if you don't have the self-control or inclination to just stick with the old large-cap stock funds that worked in the past, the following 10 defensive ETFs could be worth a look.
Data is as of July 30. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
iShares Select Dividend ETF
- Assets under management: $21.3
- Dividend yield: 3.4%
- Expenses: 0.38%
When it comes to defensive investments, many investors gravitate toward dividend stocks. That's because these companies offer a modest annual return based on regular distributions to shareholders. Perhaps more importantly, these stocks typically have significant and reliable profits to support these payments to shareholders.
The iShares Select Dividend ETF (DVY, $117.67) offers up a diverse portfolio of 100 stocks that deliver better-than-average yields – and they must have paid out those dividends for at least the past five years. That means you aren't only getting ample payouts, but underlying holdings that have proven a dedication to sharing the wealth with stockholders.
There are 100 total stocks that make up this fund, with top holdings at present including tobacco giant and Marlboro parent Altria Group (MO), oil refiner Valery Energy (VLO), and longtime tech leader International Business Machines (IBM).
DVY currently yields 3.4%, which is more than double that of the S&P 500 Index (1.6%). But what might really appeal to investors looking for low-risk options is how well it has stood up amid the market downturn. This defensive ETF has declined just 4% (and has lost less than 3% when you include dividends) while the broader S&P 500 is down more than 20%.
Vanguard Dividend Appreciation
- Assets under management: $60.0 billion
- Dividend yield: 1.9%
- Expenses: 0.06%
If you want to look beyond current yield and instead invest in future payouts, then the Vanguard Dividend Appreciation ETF (VIG, $143.47) is one of the best defensive ETFs for you.
What makes VIG attractive is that it demands the dividend stocks that make up this ETF have delivered higher dividends across the last 10 consecutive years (at least). That means you aren't only getting dividend stocks, but companies that are sharing more of their profits with their shareholders over time.
Top holdings right now include incredibly stable investments like healthcare giant Johnson & Johnson (JNJ), tech mega-cap Microsoft Corporation (MFST) and finance icon JP Morgan Chase (JPM). The nearly 300 stocks that make up this ETF give you a pretty diversified footprint in the U.S. equity market, and give you a way to invest in stocks in a defensive way.
The yield on this ETF is 1.9% at present, which still tops the S&P 500, albeit not by nearly as much as DVY. But perhaps more important than the current yield is the fact that these dividends are likely to grow over time based on the methodology of this defensive ETF.
Invesco S&P 500 Low Volatility ETF
- Assets under management: $9.6 billion
- Dividend yield: 2.0%
- Expenses: 0.25%
Rather than look for dividend paying stocks, another defensive strategy is to seek out stocks that "wiggle" less than the typical stock on Wall Street.
Sure, that might mean that in raging bull markets, you leave a bit of profit on the table. But when things get rocky, it's incredibly important to have holdings that hang tough even when the market is stuck in a tailspin.
That's what the Invesco S&P 500 Low Volatility ETF (SPLV, 2.0%) offers: reduced volatility and more even returns over time. Specifically, the fund is comprised of about 100 stocks that exhibit the lowest realized volatility over the past 12 months among all S&P 500 components.
Perhaps unsurprisingly, 25% of SPLV's portfolio is allocated to utilities and 21% to consumer staples as these sectors typically present lower risk and act more defensively than other sectors. So if you're looking for a fund that will steer clear of aggressive investments, this low-vol defensive ETF should hit the spot.
Invesco S&P 500 High Div Low Volatility
- Assets under management: $3.8 billion
- Dividend yield: 3.6%
- Expenses: 0.30%
What do you buy if you like the notion of higher dividends as a way to invest in stocks with proven profits and a track record of delivering shareholder value … but you also like the idea of lower-volatility stocks that mitigate potential declines?
Well, a few defensive ETFs offer a marriage of both ideas in a single holding.
The Invesco S&P 500 High Dividend Low Volatility ETF (SPHD, $44.14) is one such fund. This concentrated portfolio has just 50 total positions, but that results in a generous dividend yield as well as the potential to sidestep big market declines through a low-vol strategy.
From a total return perspective (price plus dividends), the S&P 500 has lost just a hair under 20% through the first half of 2022. SPHD? Less than 1%. That's thanks in big part to a 3.6% dividend yield that's well more than twice that of the S&P 500.
But like with SPLV, SPHD isn't designed to surge when Wall Street booms. But if you're looking for a defensive fund that will provide consistent returns, then SPHD is certainly worthy of consideration.
iShares MSCI USA Quality Factor ETF
- Assets under management: $19.0 billion
- Dividend yield: 1.5%
- Expenses: 0.15%
An interesting defensive ETF for investors looking for higher-quality stocks is the iShares MSCI USA Quality Factor ETF (QUAL, $111.73). QUAL offers exposure to large and mid-cap U.S. stocks that exhibit strong fundamentals as well as a historic tendency to outperform their peers.
To be clear, this is all backtested data – and as the old saying goes, past performance is no indicator of future returns. However, this data is still useful is indicating which stocks have a track record of surviving even the worst downturns and thus have a good chance of hanging tough in the next crisis.
Right now, QUAL holds about 130 different companies. Telecom giant Verizon (VZ), soft drink king Pepsico (PEP) and fast-food icon McDonald's Corporation (MCD) are among the top holdings at present.
These aren't exactly the growth-oriented names that many investors look for if they want to generate big-time returns in a short period of time. But they are representative of the kind of high-quality and defensive investments that you'll find in QUAL. All these stocks exhibit strong fundamentals, including a high return on equity (RoE), stable year-over-year earnings growth and low financial leverage – factors that should ensure staying power in most markets.
GraniteShares Gold Trust
- Assets under management: $996.1 million
- Dividend yield: N/A
- Expenses: 0.1749%
Looking beyond stocks, it's important for many investors looking for defensive ETFs to consider low-risk alternative assets – and right now, one of the most attractive alternatives to put money into is gold.
The GraniteShares Gold Trust (BAR, $17.91) is one of several gold-backed funds that is tied to physical gold – not stocks that mine or process the metal. It's a liquid and established ETF, with around $1 billion in total assets. But more notably, it's one of the cheapest gold-related funds out there with just 0.1749% in expenses – or just $17.49 per year on every $10,000 invested.
To be clear, gold is an uncorrelated asset, but that doesn't necessarily mean that it is a good long-term play. For instance, gold has roughly tripled since 1980, from about $600 per share to around $1,800 today. But the S&P 500 has gone on to log roughly 3,400% returns in that same time period (no, not a typo) – and that doesn't even include the impact of dividends.
But it's worth pointing out that the stock market has crashed hard in 2022, so whatever the long-term projections might be there, there's still the potential of short-term instability. So if you're a defensive investor, BAR offers you another way to hang tough.
Invesco Optimum Yield Diversified Commodity Strategy
- Assets under management: $8.7 billion
- Dividend yield: 39.6%
- Expenses: 0.62%
If you're interested in uncorrelated assets, then your search for defensive ETFs might have to go beyond just precious metals.
The Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF (PDBC, $18.04) is a good commodity ETF option for investors looking for a truly diversified footprint in raw materials in one simple holding.
With almost $10 billion in assets at present, PDBC seeks to track a basket of the 14 most heavily traded commodity futures contracts, including oil, gold and corn. Several of these holdings are energy-related, including gasoline, low-sulfur diesel fuel and two forms of crude oil: Brent, a European benchmark, and West Texas Intermediate, which is more closely aligned with North American production trends.
Still, you get a good swath of agricultural and metal products to provide a pretty direct and diversified footprint in key raw materials.
Beyond the defensive nature of commodities – particularly in an inflationary environment like this one – an additional draw of this fund is that investors can avoid the dreaded K-1 tax form that other similar funds issue because of how they're structured. That means you can gain exposure to commodity futures in your normal brokerage account and file your taxes as usual without hassle come April.
And one quick note about the yield: PBDC pays out a variable annual distribution. The current yield, then, isn't at all indicative of what an investor should expect year in and year out.
iShares 1-3 Year Treasury Bond ETF
- Assets under management: $25.8 billion
- SEC yield: 2.4%*
- Expenses: 0.15%
If you really want to be defensive, the rock-solid nature of U.S. government debt should definitely be on your list of investments. And if you want to reduce your risk even more, short-term Treasury bonds that come due in just a few years are among the most secure of all debt. After all, if Washington goes bankrupt in the next 18 months, we all have much bigger problems than our retirement portfolios!
The iShares 1-3 Year Treasury Bond ETF (SHY, $82.79) is a $26 billion fund that invests solely in short-term Treasuries, with an average maturity of about 1.9 years across its holdings right now. And while the trailing yield based on the last year of payouts isn't particularly impressive, the SEC yield based on the most recent 30 days is 2.6% – with an average yield to maturity of 3.2%. Because of the current rising-interest-rate environment, low-yield bonds are regularly rolling off the portfolio and being replaced by higher-yield ones.
It's worth noting that a rising-rate environment does weigh on bond prices. (Remember: Bond yields and prices move in opposite directions.) However, SHY is much more insulated from this trend than funds with longer-dated holdings. Consider SHY's sister fund, the iShares 20+ Year Treasury Bond ETF (TLT), is down 19% over the past 12 months while SHY has declined less than 4%.
Considering the volatility elsewhere on Wall Street, that level of stability is an incredibly attractive trait for investors looking for defensive ETFs right now.
* SEC yield reflects the interest earned for the most recent 30-day period after deducting fund expenses. SEC yield is a standard measure for bond funds.
Simplify Interest Rate Hedge
- Assets under management: $302.0 million
- Dividend yield: 0.02%
- Expenses: 0.50%
Recently highlighted as one of the 12 best ETFs to battle a bear market, the Simplify Interest Rate Hedge (PFIX, $56.47) is among the best-performing funds through 2022's first half with a phenomenal return of more than 50%.
Those kinds of returns are hard to come by in any market environment, but they're particularly impressive this year.
PFIX's primary strategy is to invest in interest-rate options, so its performance is driven by tighter monetary policy and a rising-rate environment. In other words, when rates go up, so does PFIX. And considering the U.S. Federal Reserve just delivered its biggest rate hike since 1994 and Kiplinger is now expecting benchmark rates to hit 3.75% by early next year, it looks like we've only seen the early stages of rate hikes.
To be clear, Simplify's fund actually poses a big risk here if interest rates roll back and things get back to usual on Wall Street. However, given the very clear intentions of the Fed and the persistent threat of steep inflation, that doesn't seem very likely in the near-term.
And like many of the other defensive ETFs on this list, one of the biggest draws of PFIX is its ability to hang tough and provide decent returns when the conventional stocks in your portfolio are struggling to deliver.
Cambria Tail Risk ETF
- Assets under management: $491.5 million
- Dividend yield: 0.8%
- Expenses: 0.59%
If you want to get serious about defensive investments, then consider the Cambria Tail Risk ETF (TAIL, $17.58) which is in many ways more of an insurance policy than a way to build your nest egg. That's because TAIL is a unique vehicle that is focused on mitigating "tail risk" events that aren't very common but can cause incredible disruptions to your portfolio when they do happen.
The strategy of this fund involves cheap but pessimistic options contracts on the U.S. stock market, along with a hefty allocation in low-risk U.S. Treasuries. In a benignly higher bull market, this strategy isn't a particularly effective one. But when you consider the fund is almost flat with where it started 2022 – and up 6% in Q2 while the S&P 500 was off 16% – it should be apparent that TAIL can provide unrivaled stability when the typical large-cap stock fund can't stay afloat.
This kind of defensive ETF shouldn't be a core holding, but some investors find value in a modest allocation toward TAIL that functions much like auto insurance. You might not be particularly thrilled to keep writing those checks for premium payments each month, but when there's a crash, you'll be glad you're covered.
