The Best Defensive ETFs to Protect Your Portfolio

Various stock market indicators flashed warning signs in the first half of 2025 after the implementation of President Donald Trump's tariffs policy in early April.

One of the most well-known sentiment gauges, CNN's Fear & Greed Index, wallowed in "Extreme Fear" territory through April 21 before recovering to "Extreme Greed" as of July 17.

This benchmark measures market sentiment using factors such as stock price momentum, put and call options, and volatility.

Meanwhile, the Cboe Volatility Index (VIX) – which tracks expected volatility in the S&P 500 based on options pricing and is often called Wall Street's "fear gauge" – surged as high as 60.13 on April 7.

A rising VIX suggests that investors are preparing for more market turbulence ahead.

The "normal" range for the VIX is between 12 and 20.

Adding to the concern is the Buffett Indicator, which compares the total U.S. stock market's value to gross domestic product (GDP).

As of July, it sits at 209%, well above historical norms.

Even Warren Buffett himself appears cautious – his company, Berkshire Hathaway (BRK.B), is sitting on a record $348 billion in cash while trimming long-held positions in his portfolio.

If you're looking to take a defensive approach and protect your portfolio against potential downside risk, defensive ETFs can help. Here's what you need to know.

What makes an ETF defensive?

For equity exchange-traded funds, defensiveness is often measured by beta, a metric that tracks how much an ETF fluctuates relative to the overall stock market.

Think of an ETF as a ship and the market as the sea – if the sea gets rough, a sturdy, well-balanced ship (low-beta ETF) will sway far less than a smaller, top-heavy vessel (high-beta ETF).

Since the market has a beta of 1, defensive ETFs tend to have a beta well below that, meaning they experience smaller price swings on average.

Some ETFs are explicitly designed for low volatility. For instance, certain funds screen stocks from the S&P 500 based on their historical beta, selecting only the least historically volatile subset of stocks.

Other ETFs naturally have lower beta due to the defensive sectors they target. Consumer staples, healthcare and utility funds tend to be more stable since demand for food, medicine and electricity remains inelastic – meaning people continue to buy these essentials regardless of economic conditions.

For bond ETFs, defensiveness is a function of credit quality and duration. ETFs holding high-quality bonds, such as U.S. Treasuries, tend to be more resilient during downturns since investors flock to them as safe havens.

On the other hand, high-yield "junk" bond ETFs may see steep losses as the creditworthiness of their issuing companies gets called into question during economic downturns.

Similarly, bond ETFs with lower duration tend to hold up better when interest rates rise. Duration measures a bond's sensitivity to interest rate changes, so short-term bond ETFs are less volatile than long-term bond ETFs, which suffered significant losses in 2022 amid rising rates and high inflation.

A common mistake with defensive ETFs is using them tactically – that is, rotating into them after a market downturn to try and minimize losses. This is just market timing; a strategy that often backfires as investors tend to react too late after much of the damage has already been done.

If you're going to invest defensively, it should be a long-term component of your allocation strategy. Have a plan for how much exposure to defensive ETFs you want and when to rebalance, and stick to it.

How we chose the best defensive ETFs to buy

We screened out ETFs that rely on complex, derivative-based hedging strategies. These products, while useful for institutional investors and advisers, tend to be costly and impractical for DIY retail investors.

Instead, we focused on fixed-income and equity ETFs that demonstrated resilience during major downturns – particularly the March 2020 COVID-19 crash and the 2022 bear market. These periods were stress tests for defensive assets, revealing which ETFs effectively preserved capital when markets sold off.

We also screened for reputability, ensuring that each ETF has sufficiently high assets under management (AUM) – a key measure of fund size. ETFs with low AUM face a higher risk of closure, and those with low trading volume tend to have wider bid-ask spreads, making them more expensive to buy and sell.

Finally, cost matters, so we prioritized ETFs with reasonable expense ratios. There's no point in avoiding market losses if high fees erode your potential gains.

Data is as of July 15. Dividend yields on equity funds represent the trailing 12-month yield, which is a standard measure for equity funds. Yields on bond funds are SEC yields, which reflect the interest earned after deducting fund expenses for the most recent 30-day period.