The broader market is sending a clear signal as speculative assets like cryptocurrencies have taken a dive. ETFs like the iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT | TLT Price Prediction), Vanguard Health Care Index Fund ETF (NYSEARCA:VHT) and iShares MSCI USA Min Vol Factor ETF (BATS:USMV) can be a great counterbalance against the decline. It’s not just cryptos that are declining, though. The S&P 500 Software & Services index is down by nearly 19% over the past month alone.
What the market wants right now is value, growth, and profitability from these software companies in the AI era. Very few of them offer all three, and even those that can do that are trading at what many consider to be a “fair valuation.
If you believe the recent selloff in the software sector and the crypto market will spill over into everything else and turn into a recession, you’re not alone. Many others believe we’re on the brink of at least a correction after such a significant rally.
Here are the ETFs you can look into.
iShares 20+ Year Treasury Bond ETF (TLT)
The TLT is your best friend if you believe a recession can happen any day and you want an asset that goes up, not down, during one. Most if not all equity ETFs will take some sort of a hit from a recession, but not this one. TLT has a proven track record of going the other way during a downturn.
The reason is that recessions are immediately met with dramatic rate cuts from the Federal Reserve. Since this ETF holds long-duration bonds of 20 years or more, the value of its holdings goes up as these bonds have higher interest rates that are locked in for longer. During the Dot Com bust, long-term bonds surged. These bonds surged by 30% again during the Great Recession, whereas the S&P 500 more than halved.
This ETF is trading at a 50% discount from 2021 highs due to short-term Treasury yields still being relatively high. Ongoing interest rates and a new Fed chair later this year will change that. Recession or not, TLT can perform very well and surge 30-40% from here in the next 12 months.
You get a 4.43% dividend yield with a monthly distribution. The expense ratio is 0.15%, or $15 per $10,000.
Vanguard Health Care Index Fund ETF (VHT)
Healthcare makes up almost 20% of the U.S. economy and is expected to continue growing fast due to an aging population. This is one area that doesn’t get as much attention as it deserves. Healthcare gets trillions in dependable funding from the government and private citizens’ insurance. And unlike most other sectors, this one is completely indispensable.
VHT has been one of the least volatile ETFs in the past few years and consistently cushioned investors during downturns. There remains a valuation gap between healthcare stocks and the broader market that needs to be bridged. A downturn could be the perfect excuse for that. Investors are looking for “risk-off” assets that can generate strong underlying cash flows. Healthcare is well-positioned to attract that capital.
There is one catch, though. VHT is more top-heavy than its peers. Top 10 holdings constitute 46% of its 422 total holdings. I still think it’s worth buying since all of those companies are trading at large discounts or are set to surge more.
VHT comes with a 1.59% dividend yield and a rock-bottom expense ratio of 0.09%.
iShares MSCI USA Min Vol Factor ETF (USMV)
USMV has a fitting name and is one of the most respected defensive ETFs in the market. The fund does not just hold safe stocks but also mathematically constructs the least volatile portfolio possible from large and mid-cap stocks. It is a natural fit if you want to add ballast to your portfolio ahead of a possible recession.
USMV tracks the MSCI USA Minimum Volatility (USD) Index, and the mechanism is more sophisticated than simply picking stocks that don’t move much. Rather than assembling a basket of individually low-volatility names, the index uses an optimization algorithm that builds a minimum-variance portfolio. It accounts for the correlations between stocks, not just each stock’s standalone volatility.
A lot of ETFs just screen for the calmest stocks and end up with a list of stocks from the same sector. These ETFs are safe on paper, but sector-specific shocks can hit them hard. This one is unlikely to fall victim to that due to the algorithm smoothing out each sector’s rough edges.
That’s why you’ll find some names in the portfolio that aren’t particularly “boring” on their own. They’re there because they zig when other holdings zag, and that offsetting effect is exactly what keeps the whole fund calmer than the broader market.
It comes with a 1.46% yield and an expense ratio of just 0.15%, or $15 per $10,000.
Top Gaining Stocks
Top Losing Stocks