The current dynamics playing out in the stock market are really hard to describe right now. On the one hand, there are pockets of the economy that are red-hot, with hundreds of billions of dollars flowing into high-powered growth trends like AI that are clearly propping up valuations across the board.
The Vanguard Utilities ETF (VPU) provides defensive exposure with one-third to one-half of returns coming from dividends.
The iShares 20 Plus Year Treasury Bond ETF (TLT) offers 4.3% yield and hedges against stock market corrections.
The Vanguard FTSE Developed Markets ETF (VEA) provides non-U.S. developed market exposure at a 0.03% expense ratio.
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On the other hand, the vast majority of stocks in the overall market may already be in bear market territory. That’s representative of a weakening consumer, and the view that valuations may have gotten a bit too distorted in the post-pandemic era.
Forget stocks, other asset classes like real estate could be more overvalued right now relative to where interest rates are today. And while I do expect interest rates to come down, there are risks with bonds and other top securities as well, leaving few seemingly good options to park some capital right now.
For those thinking about how to navigate this market, here are three top options to consider right now. I’m going to focus on three exchange traded funds (ETFs) as ways to play the market in this piece, as these holdings should provide solid upside for passive and active investors alike.
There’s perhaps no more defensive sector in the market right now than utilities, and the Vanguard Utilities ETF (VPU) remains my top ETF pick for long-term investors looking to ride these trends over time.
Sure, there’s plenty of growth upside within the utilities sector that could be explored in its own dedicated article. But I think the relative value that comes from having between one-third and one-half of the returns from this sector coming from dividends is important to consider.
Utilities companies are typically mature entities that benefit from very sustainable underlying cash flow growth profiles. Regulators have to approve price increases over long periods of time, providing assurances to investors that they’ll get paid back. The capital-intensive nature of this industry has provided for such fundamentals, and that’s one of the most attractive aspects of this particular sector worth considering.
Instead of buying any one or grouping of utilities stocks alone, I prefer to play this trend via VPU. It’s one of my largest ETF holdings in my portfolio for this reason, generating around 2.6% in yield right now at an expense ratio of 0.09%. Those are fundamentals I like.
I continue to think that bonds represent a unique opportunity for investors today, and the iShares 20+ Year Treasury Bond ETF (TLT) is one of the best options for investors looking for portfolio protection, in my view.
I continue to have the perspective that interest rates will have to trend lower over time, if not only for the fact that governments around the world who hold U.S. debt will not want to see the value of their holdings decline (and the U.S. government also won’t want higher interest rates, which increases its debt servicing costs).
With the long-term trends of lower interest rates being challenged due to inflation picking up in recent years, this may be a choppy bet. But if stocks start falling meaningfully in a correction or bear market situation, TLT is one ETF that could outperform the rest.
The ability for investors to hedge out their interest rate sensitive exposure, and play lower rates over the long-term, in one ETF is impressive. With a current dividend yield of 4.3% and an expense ratio of 0.15%, TLT is a top option for long-term investors right now.
Last, but certainly not least on this list of defensive ETF options for investors to consider is the Vanguard FTSE Developed Markets ETF (VEA).
I’ve thought for a few years now that U.S. equities are broadly overvalued, compared to their own historical metrics. However, compared to the rest of the world, this valuation divergence is even more notable.
What VEA does is allows investors looking to broaden out their geographic concentration in the U.S. market to other high-quality developed markets to do so. Via investing in key markets in Europe and Asia (such as Japan), VEA doesn’t provide the higher-risk emerging markets exposure that may turn some investors off. Rather, this fund looks to buy non-U.S. proxies in the highest quality and most stable markets around the world.
With a dividend yield of 2.8% (much higher than nearly any index fund tracking U.S. stocks) and a rock-bottom expense ratio of 0.03%, I don’t see what’s not to like about holding some VEA and diversifying out some of the geographic risk associated with being all-in on one stock market. Those thinking long-term can supplement U.S. exposure with such an ETF and sleep much better at night. At the end of the day, I think that’s the most valuable thing VEA and the other two picks on this list provide.
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