These Vanguard funds won’t necessarily keep you from losing money if the market crashes. But they can help cushion the blow.
Investors may be getting spoiled. The S&P 500 (^GSPC 0.43%) has delivered double-digit gains for three consecutive years, with returns in two of those years topping 23%.
The idea of a stock market crash might seem silly. However, two indicators — the S&P 500 Shiller CAPE ratio and the Buffett indicator (which measures total stock market capitalization as a percentage of GDP) — could be omens of troubling days ahead.
What can investors do to protect their portfolios from a potential crash? Consider buying these three Vanguard exchange-traded funds (ETFs).
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1. Vanguard Short-Term Treasury ETF
In the past, long-term U.S. Treasuries were widely viewed as the ultimate safe haven. However, investment manager State Street (STT 0.43%) conducted an analysis last year that concluded, “Long-duration Treasuries no longer reliably offset equity drawdowns.” This view has been reinforced recently, with China’s holdings of U.S. Treasuries declining to the lowest level since 2008. Denmark announced it would sell all of its Treasuries, stating that its “decision is rooted in the poor U.S. government finances.”
Short-term Treasuries are a different story, though. State Street found that shorter-dated government bonds are now better alternatives for investors seeking safety. That’s why I’ve listed the Vanguard Short-Term Treasury ETF (VGSH +0.07%) first on our list.
Vanguard Scottsdale Funds – Vanguard Short-Term Treasury ETF
Today’s Change
(0.07%) $0.04
Current Price
$58.86
Key Data Points
Day’s Range
$58.83 – $58.87
52wk Range
$58.09 – $58.98
Volume
3M
This Vanguard fund currently owns 92 U.S. Treasury bonds with an average duration of 1.9 years. It’s also cheap to hold, with a low annual expense ratio of 0.03%.
You probably won’t make a ton of money from the Vanguard Short-Term Treasury ETF if the market crashes. However, its 30-day SEC yield is roughly 3.6%. And you’re unlikely to lose money owning this fund.
2. Vanguard Total Bond Market ETF
Aside from U.S. Treasuries, one of the safest places to park your money is in investment-grade bonds. Often (although not always), bond prices rise when stock prices fall. The Vanguard Total Bond Market ETF (BND +0.01%) is arguably the best bond ETF in the Vanguard family for downside portfolio protection.
This Vanguard ETF owns a whopping 11,444 bonds. The average duration of these bonds is 5.7 years, putting the fund squarely in the intermediate-duration category. Around 69% of the Vanguard Total Bond Market ETF’s holdings are U.S. government bonds. The remainder of its portfolio is invested in corporate bonds with ratings of BBB (medium-grade credit quality) or higher.
Vanguard Total Bond Market ETF
Today’s Change
(0.01%) $0.01
Current Price
$74.27
Key Data Points
Day’s Range
$74.22 – $74.30
52wk Range
$71.41 – $75.15
Volume
289K
Granted, the risk level of the Vanguard Total Bond Market ETF is somewhat higher than investing in nothing but short-term U.S. Treasuries. However, you get paid more in exchange for the elevated risk, with a 30-day SEC yield of almost 4.2%.
Vanguard pitches this ETF for investors who see a “relatively high potential for investment income” and want to diversify the risks of owning stocks in their portfolios. I think the Vanguard Total Bond Market ETF checks off both boxes well.
3. Vanguard U.S. Minimum Volatility ETF
The Vanguard U.S. Minimum Volatility ETF‘s (VFMV +0.36%) name probably gives you a good idea why this ETF made the list. The fund’s portfolio includes stocks, which are usually riskier than Treasuries and bonds. However, the ETF uses a quantitative model to select only stocks that are likely to be less volatile than most.
This Vanguard ETF currently owns 186 stocks representing 10 sectors. Its top holdings include Lam Research (LRCX 6.04%), Johnson & Johnson (JNJ 0.02%), Keysight Technologies (KEYS 2.19%), and The Coca-Cola Company (KO +1.88%). However, no single stock makes up more than 1.6% of the fund’s overall portfolio.
Vanguard Wellington Fund – Vanguard U.s. Minimum Volatility ETF
Today’s Change
(0.36%) $0.48
Current Price
$134.94
Key Data Points
Day’s Range
$133.93 – $134.94
52wk Range
$112.97 – $138.49
Volume
11K
You’ll have to pay a slightly higher annual expense ratio (0.13%) with the Vanguard U.S. Minimum Volatility ETF than with the other two ETFs previously mentioned. That’s still lower than most ETF expense ratios, though.
To be sure, this Vanguard ETF probably won’t be immune from a steep stock sell-off. However, with a beta of 0.56, it shouldn’t sink nearly as much as the broader market if there’s a crash.
