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5 Defensive ETF Areas to Consider Amid Current Market Meltdown

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Inflation, the Federal Reserve’s aggressive stance on rate hikes and recession fears are the three external factors that are keeping investors on edge. Wall Street came under the heat of these factors again as a bloodbath was observed in the major market indices on Jun 13. The S&P 500 Index closed in the bear market territory as it declined 3.9%, hitting its lowest level since March 2021 on the same day. The other two broad market indices, the Dow Jones Industrial Average and the Nasdaq Composite, were also down 2.8% and 4.7% on Jun 13.

The latest release of hot inflation readings dashed hopes of inflation levels peaking in May. Per the latest Labor Department report, the Consumer Price Index (CPI) jumped 8.6% year over year in May (the maximum since 1981), surpassing the already high Dow Jones estimate of an 8.3% rise. The metric compared unfavorably with the 8.3% rise in April.

Speculations are making rounds about the Federal Reserve taking a very tough stance on interest rate hikes. A Wall Street Journal report recently stated that the central bank might hike interest rates by 0.75% in the June meeting, per a CNBC article. Consequently, the 10-year Treasury yields also jumped more than 20 basis points to surpass 3.3% on Jun 13.

Studying the current market backdrop, analysts are recommending opting for defensive plays. In this regard, Truist’s Keith Lerner has suggested taking a “defensive posture” in certain areas like consumer staples and health care, according to a CNBC article. Going on, Jack Ablin, founding partner of Cresset Capital has also mentioned considering gold and dividend-paying stocks, as stated in a CNBC article.

Therefore, taking the tough market conditions into account, let’s find out some investment options for the market participants who wish to ride safe:

Healthcare ETFs to Consider

The healthcare sector is a good defensive investment as several investors believe consumers will have to purchase healthcare products even during tough and uncertain times. Its non-cyclical nature provides defensive coverage to the portfolio amid market turbulence. Undoubtedly, the pandemic also triggered a race to introduce vaccines, tests and treatment options, opening up investment opportunities in the healthcare sector. Currently, the Russia-Ukraine war crisis and the Fed’s aggressive stance on rate hikes caused a lot of uncertainty in the markets.

Investors can look at some healthcare ETFs like The Health Care Select Sector SPDR Fund XLV, iShares U.S. Healthcare ETF IYH, Fidelity MSCI Health Care Index ETF (FHLC) and Vanguard Health Care ETF (VHT) (read: 1970s-Style Stagflation in the Cards? ETF Strategies to Win).

Consumer Staples ETFs in Focus

The consumer staples sector is known for its non-cyclical nature and acts as a safe haven during unstable market conditions. Moreover, like utility, consumer staples is considered a stable sector for the long term as its players are likely to offer decent returns. Investors can consider parking their money in the non-cyclical consumer staples sector during an economic recession. This high-quality sector, which is largely defensive, is found to have a low correlation with economic cycles.

Here we highlight certain ETFs that can be safe bets like The Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC, Fidelity MSCI Consumer Staples Index ETF (FSTA) and iShares U.S. Consumer Staples ETF (IYK) (see: all Consumer Staples ETFs here).

Dividend Aristocrat ETFs to Bet on

Amid a complicated market environment, investors prefer investments that can be a reliable source of consistent and dependable income. In such a scenario, dividend aristocrats can come to the rescue. These are blue-chip dividend-paying companies with a long history of increasing dividend payments year over year. Moreover, dividend aristocrat funds give investors dividend growth opportunities compared to other products in the space but might not necessarily have the highest yields. As a result, these products deliver a nice combination of annual dividend growth and capital-appreciation opportunity and are mostly good for risk-averse long-term investors.

Let’s look at some ETFs like Vanguard Dividend Appreciation ETF VIG, SPDR S&P Dividend ETF SDY, iShares Select Dividend ETF (DVY) and ProShares S&P 500 Dividend Aristocrats ETF (NOBL) that investors can consider (read: 5 Recession-Proof ETFs for Your Portfolio).

Gold ETFs to Hedge Inflation

Given the current scenario, gold prices have been rising for a while. The inflationary backdrop in the United States is favorable for gold as the metal is viewed as a hedge against inflation.

Gold ETFs mostly move in tandem with gold prices. The SPDR Gold Shares GLD and iShares Gold Trust IAU are some popular ETFs (read: Guide to the Gold ETF Investing).

Low-Volatility ETFs to Navigate Market Turbulence

Demand for funds with “low volatility” or “minimum volatility” generally increases during tumultuous times. These seemingly safe products usually do not surge in bull market conditions but offer more protection than the unpredictable ones. These funds are less cyclical, providing more stable cash flow than the overall market.

Low-volatility products could be intriguing choices for those who want to continue investing in equities amid market mayhem. Consider the following exciting options like iShares MSCI USA Min Vol Factor ETF USMV, Invesco S&P 500 Low Volatility ETF SPLV, iShares MSCI Global Min Vol Factor ETF (ACWV) and Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) (read: 5 Safe Investing Zones &Their ETFs to Escape Market Rout).


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