Key insights
- The article suggests buying Vanguard High Dividend Yield ETF (VYM) and Vanguard Health Care ETF (VHT) to protect against a potential market crash. Concerns include a stagnating labor market, rising inflation, and geopolitical uncertainty. The author argues that dividend and healthcare stocks are more defensive and can help shield portfolios from market downturns, especially given the high concentration of tech stocks in many portfolios.
Even as the S&P 500 continues to set new all-time highs, there are some warning signs emerging. The labor market is showing signs of stagnating, inflation shot much higher in March, and the Iran war is hanging a cloud of uncertainty over everything.
Corporate earnings are still likely to show solid growth in the coming quarters, but a weakening economic foundation could reverse that quickly. This puts the equity markets in a potentially vulnerable spot where equities could fall sharply and quickly.
Most investors have a significant percentage of their portfolios in tech stocks. Even investments in the S&P 500, which are considered diversified, have more than 30% of assets dedicated to the sector. That kind of growth tilt can be a hazard in a market where investors look to take risk off the table.
That's why considering investments that are designed to provide some level of protection is timely. Each of these three Vanguard ETFs has some key characteristic designed to help shield you from the next market crash.
Dividend stocks are considered more defensive because companies are likely at a more mature, established stage in their life cycle, and they're generating the necessary cash flow to support regular, ongoing shareholder payments.
The Vanguard High Dividend Yield ETF (VYM 0.43%) takes a more generic approach to high-yield investing by simply selecting the top 50% of yields from a broad equity universe. This combination of diversification and targeting more value-oriented stocks generally ends up doing relatively well in a down market.
Healthcare stocks are considered one of the more recession-proof sectors of the market. Consumers can cut back spending on a lot of things, but they usually keep spending on healthcare regardless of the economic environment.
The Vanguard Health Care ETF (VHT 0.42%) invests in a broad array of companies focused on healthcare products, services, technology, or equipment. These healthcare stocks may not necessarily generate positive returns in a market downturn, but they're likely to hold up better with this consistent revenue stream.
Inflation has been a problem for the U.S. economy since the COVID-19 pandemic. Now, the Iran war is heating it back up again. Inflation traditionally accelerates market downturns, so it makes sense to have at least part of your portfolio dedicated to protecting against it.
The Vanguard Short-Term TIPS ETF (VTIP +0.14%) invests in Treasuries that adjust in value along with the rate of inflation. This helps keep consumers' purchasing power intact regardless of how fast prices are rising.
Thinking about how to protect your portfolio principal is always a good exercise, but especially so if you feel that a potential bear market is a real risk. These three Vanguard ETFs would be a great starting point.