ETFs( Exchange-traded funds) help investors build their diversified portfolios. The funds are a basket of securities whose benefits are similar to those offered by bonds, stocks, or mutual funds. The prices of ETFs are determined by the supply and demand forces. Due to the volatility exposure, investing in defensive ETFs is an excellent way to cushion an investor against high risks. Although we are generally told that high risks equate to high returns, in stocks, it has been shown that low-volatility stocks offer better risk-adjusted performance than high-risk stocks. So, let’s take you through five suggestions to round your portfolio since it is advisable to have at most four ETFs.
Invesco Defensive Equity ETF
If you are looking for exposure in the Large Cap Growth segment, you cannot go wrong with Invesco DEF. Since its launch in 2006, so far, it has over $290 million worth of assets. Therefore it cannot flaunt itself as one of the Large Cap Growth companies- it would need assets worth $10 billion to be in that category. As a growth stock, it has the potential to outperform the rest in everything, including sales and valuations.
The Defensive Equity Index that the DEF uses helps to select firms that balance out the portfolios. During market weakness periods, the companies have a superior risk-return profile, and in times of market strength, there are opportunities for high returns. It is cited as a medium-risk pick whose 102 holdings are enough to round out your portfolio effectively. The specifics include its primary allocation in the IT sector, Health, and Industries. With an annual operating expense of 0.55%, a dividend yield of 1.12%, and share price fluctuating between $37.36 and $58.86 by August 2020, Invesco should be among your top picks.
The Motley Fool explained that John Bogle founded Vanguard to provide a cost-effective way for investors to invest. Therefore, buying Vanguard ETFs directly from Vanguard is free in terms of trading commissions. It had an extensive portfolio of index funds categorized under small-cap, mid-cap, and large-cap, thereby catering to investors of different financial abilities. Some are international bonds, government bonds, and tax-exempt, among many other classifications. The bottom line is they are attractive to investors due to the low fees.
By October 6, 2020, Vanguard enjoyed the fruits of investors going defensive since of the 20 largest-inflow defensive ETFs, 8 were Vanguards. An expert explained that Vanguard attracts investors who are seeking to make allocation changes in their portfolio. Therefore, its inflows and outflows tend to be stable. September 2020 was a good month for the company, and you should not be surprised that it has always been included among the top defensive ETFs one should consider for the past three years.
If you are looking for diversification, then iShares ETFs are your answer. With over 800 ETFs worldwide, it is a leading ETF provider with assets worth $1.9 trillion under its management. Of these 800, Forbes gave us four to consider in April 2019. The criterion used is the expense ratio, which should ideally be below 0.50%, especially if you are considering one to buy and hold.
By October 2019, the head of US Factor ETFs said that the growth in popularity that iShare ETFs had shown exceeded her expectations. She explained investors are interested in rounding out their portfolio through resilience; thus, quality and low-volatility investments are their best strategy. She further added that investors now realize it is worth missing out on potential gains if it means opting out of significant losses. Therefore, even as Vanguard celebrates a good win, iShare follows closely behind with five ETFs in the lineup of those with the most massive inflows during September 2020.
Utilities Select Sector SPDR ETFs
Water is life; hence owning stocks in a company that supplies water puts you at an advantage knowing the commodity will always be in demand. The same goes for electricity and gas, which individuals and companies need, to run their businesses. Although most countries have these under government monopolies to ensure regulation, the investments’ returns are still worth it. Even though many companies have been shut down or sized down during the pandemic, utilities in homes have remained in use; hence dividends of utility companies have barely been affected.
The utilities Sector SPDR Fund was listed in 1998, and it comprises 28 holdings, of which 62% are electric utilities according to Investing. It has $12 billion assets under management, which are mainly from the top ten holdings. It usually invests 95% of its assets, and the net expense ratio is 0.13%, which is quite favorable for long-term investing.
Consumer Staples Select Sector SPDR Fund
Remember when the pandemic caused panic, and just before lockdown, people stocked up on certain items fearing that they would be in short supply? Well, that is the great thing about investing in consumer staples; regardless of how tight money is, people need to be clean, so toilet paper, soap, toothpaste, and such like products will always be in demand. As a result, the companies producing these products enjoy unwavering profits, and as an investor, you are guaranteed dividends every year. Cabot wealth even says that consumer staples tend to outperform giant tech companies when the market is under pressure. After all, you would not choose to buy a laptop over rolls of tissue paper and food when the wallet is making you choose.
The fund’s top ten holdings include Procter & Gamble, which leads with 17.7%, followed by Walmart, Coca-Cola, Pepsi Co. Costco, and a few more. It usually invests at least 95% of its total assets. The index comprises companies dealing with personal products, food products, household products, food retailing, beverages, and tobacco, as is evident from the top ten list of its holdings. The expense ratio is also 0.13%, which is low enough to entice any investor.