The broader stock markets are really starting to heat up heading into the election. Indeed, it’s been quite a calm rally for this time of year! Given recent market action, it seems like a Trump presidential victory is being partially priced in, with banks picking up a bit of traction, likely in hopes of deregulation, and Trump Media & Technology Group (NASDAQ:DJT) gaining meaningful ground in recent weeks — up close to double in the past month.

As we head towards election day with new highs on the S&P 500 and extended valuations on specific tech names, I think taking a more defensive stance with your next stock (or ETF) purchase seems smart. After all, it’s times when investors are calm (and even sanguine) that it makes sense to bet on the inevitable return of fear on Wall Street.

Key Points About This Article

• Defensive ETFs could be a solid bet if you seek to derisk ahead of the U.S. election.
• The bull market could still have years of gains to come. But it doesn’t hurt to be prepared for the unexpected return of the bear!
• If you’re looking for some stocks with huge potential, make sure to grab a free copy of our brand-new “The Next NVIDIA” report. It features a software stock we’re confident has 10X potential.

Of course, it’s impossible to tell when the market meltdown will happen. Perhaps the AI “bubble” some skeptics have been talking about isn’t inflating before our eyes. But just because it’s not about to go bust does not mean a painful correction can’t happen at some point over the next six months.

Either way, playing defense can be a good move during excess market optimism, even if you don’t expect a market drop to arrive by the year’s end. Here are two ETFs that may steady the sails if you’re not yet prepared for markets to be a rougher ride heading into 2025.

iShares 1-3 Year Treasury Bond ETF

The bond funds are a great place to look if you want to rotate and derisk. As interest rates fall, I’d look for bond funds like the iShares 1-3 Year Treasury Bond ETF (NASDAQ:SHY) to move higher while its yield looks to make a move towards 3% (it’s at 3.7% at the time of writing).

Of course, you won’t score a huge gain with this safe haven, even if rates drop to the floor. Even if shares were to break out past 2020 highs, you’d be looking at a gain of around 5%.

While there are riskier, more rewarding bond funds out there, none of them are as rock-solid as the SHY for those serious about playing defense. If the yield appeals to you and you’re looking for a bountiful place to park cash as savings rates fall further into the new year, SHY shares are worth checking out.

iShares Edge MSCI Minimum Volatility USA ETF

No equity ETF will be 100% safe once the market crumbles in devastating fashion. That said, I think it’ll take a lot to spark such a vicious implosion. Even if the economy is in for a harder landing in 2025, it seems unlikely that anything more than a 10-15% correction will hit.

When such a milder drawdown does hit, though, the iShares MSCI USA Min Vol Factor ETF (USMV) can make sense to stash away. The low-cost ETF (0.15% expense ratio) is designed with low volatility in mind, providing investors with a somewhat smoother ride than the S&P 500. Over the past 10 years, the USMV has risen 142%, less than the S&P 500’s 199% gain. Still, if the next 10 years prove a rougher ride, the USMV may be better positioned to outperform.

Either way, I’m a fan of the types of U.S. stocks the USMV holds. When it comes to sector distribution, most of the stocks in the ETF are from the tech and financial scenes (comprising 26.1% and 17.2% of the sector breakdown, respectively). That said, the more defensive sectors, like health care, consumer staples, and utility sectors, are also well represented, comprising 15.9%, 10.4%, and 6.8% of the ETF, respectively.

Though not entirely secure from market meltdowns, the USMV stands out as a smart way to play defense if you’re looking for a smoother way to play further upside in stocks.

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