The S&P 500 index is off just 0.5% year to date. Still, it’s understandable that some investors are feeling jittery. Among the sources of concern are a weak labor market and the conflict in Iran, which is stoking unusual volatility in the oil market.
Should crude prices remain elevated for an extended period, that could contribute to unwanted increases in the Consumer Price Index (CPI), potentially endangering the case for additional interest rate cuts. Typically, central banks don’t pare rates when inflation is climbing.
Investors can take steps to prepare for potential shocks with the help of these three Vanguard exchange-traded funds (ETFs), two of which don’t require forsaking stocks.
These Vanguard ETFs offer protection if markets go haywire. Image source: Getty Images.
Boring is beautiful
Common advice to investors seeking buffers against market calamity is to boost bond allocations. That makes sense, but if bears are growling, market participants should be selective about how they approach fixed income.
Municipal bonds are one way to go, and that often boring corner of the bond market is accessible with the Vanguard Tax-Exempt Bond ETF (VTEB 0.21%). With an average duration of 7.2 years, this Vanguard ETF is an intermediate-term fund. For portfolio protection or bear-market buffers, medium-term bonds are advantageous because they can be less volatile than peers with short- or long-term maturities, and they exhibit lower correlations with equities.
Vanguard Municipal Bond Funds – Vanguard Tax-Exempt Bond ETF
Today’s Change
(-0.21%) $-0.10
Current Price
$50.23
Key Data Points
Day’s Range
$50.23 – $50.39
52wk Range
$47.02 – $51.18
Volume
5.5M
This ETF has other perks. It lives up to Vanguard’s traditions of being broad-based and cost-effective, holding nearly 10,000 municipal bonds and charging a mere 0.03% annually, or just $3 on a $10,000 stake. It also sports a solid 30-day SEC yield of 3.28%.
Leave the volatility, take the stocks
Inexperienced investors might think that the best course of action in advance of or during a bear market is to dump stocks outright and move to bonds and cash. That advice ignores the inevitable rebound and the impact of capital gains taxes when profitable positions are liquidated.
Investors can mitigate those concerns with volatility-reducing ETFs such as the Vanguard U.S. Minimum Volatility ETF (VFMV 0.27%). This Vanguard ETF is worth considering in turbulent times, provided prospective market participants understand a key feature of this ETF type. When designed correctly, low-volatility ETFs outperform basic peers in bear markets, but they don’t guarantee investors won’t lose money.
Vanguard Wellington Fund – Vanguard U.s. Minimum Volatility ETF
Today’s Change
(-0.27%) $-0.36
Current Price
$135.84
Key Data Points
Day’s Range
$135.37 – $136.02
52wk Range
$112.97 – $140.51
Volume
6.1K
Many funds in the “low-vol” ETF category are passive, but this Vanguard fund is actively managed. That’s potentially positive for investors because if volatility accelerates quickly, the fund’s managers can be more responsive than index-based rivals.
This Vanguard ETF overweights defensive sectors, such as consumer staples, real estate, and utilities.
Speaking of utilities stocks…
The Vanguard Utilities ETF (VPU +1.43%) merits inclusion in the portfolio protection conversation because utilities stocks are often considered bond proxies. Reasons for that include the sector’s favorable volatility traits, above-average dividend yield (this ETF yields 2.48%), and slow earnings growth.
Today’s Change
(1.43%) $2.85
Current Price
$202.15
Key Data Points
Day’s Range
$198.40 – $202.87
52wk Range
$154.00 – $206.10
Volume
162K
There are some caveats for using this or any other ETF as bear-market insurance. Like the aforementioned low-volatility ETF, utilities don’t guarantee 100% capital preservation during downturns. Second, if a bear market coincides with a recession, power demand could decline.
Finally, and in better news, the utilities sector proved more durable during or after the bear markets triggered by the dot-com bubble bursting, the global financial crisis, and the coronavirus pandemic.
