So far, 2019 has been pretty rosy for investors. The markets are up since Jan. 1, and Corporate America is closing out an impressive earnings season that boasted the fifth-straight quarter of double-digit earnings growth.
Yet while the S&P 500 SPX, +1.47% is up by about 10% year-to-date, it's important to know the benchmarket index is back it was a year ago and remains more than 5% below its mid-2018 highs even after the recent rally.
That's because many investors are viewing stocks with trepidation lately. While it's tempting to write off such negativity as the latest hysterics from chronically pessimistic perma-bears, the reality is that future U.S. market gains may be much harder to come by.
For instance, the market’s strong track record of earnings growth of more than 10% means this kind of expansion is now the norm. Accordingly, comps are going to get increasingly difficult now that corporate tax cuts and record highs for consumer spending are already priced in. As proof that the outlook may be dimming even if present growth is substantial, research firm FactSet noted the largest round of cuts to Wall Street analysts’ earnings estimates in three years — even as it noted a more than 13% growth rate overall for S&P 500 earnings in the first quarter of 2019 so far.
At the same time, there are signs that U.S. economic growth is flagging — including the lowest reading for Bloomberg's GDP tracker since the 2009 financial crisis. That echoes concerns from earlier this year voiced by the World Bank, which predicted U.S. growth to slow to 2.5% this year and as little as 1.7% next year.
None of this is to say that we should all our stocks, of course. Slower growth is still growth, and even investors primarily concerned with capital preservation should have some equities in a well-rounded portfolio.
Still, these warning signs may hint at the wisdom of taking a slightly more defensive tack with your holdings in 2019. If you're so inclined, here are five rock-solid defensive ETFs to consider:
1. Invesco S&P 500 Low Volatility ETF (SPLV)
If you want a subtle, defensive twist on large-cap equity, the Invesco S&P 500 Low Volatility ETF SPLV, +1.07% is worth a look. For a low expense ratio of just 0.25%, the fund selects the 100 most attractive holdings in the benchmark index after screening for the lowest realized volatility over the last 12 months.
Unsurprisingly, that means a bias towards sleepier sectors; 25% of the fund is in utilities such as Exelon Corp. EXC, +0.62% and about 20% is in real estate stocks including Avalonbay Communities Inc. AVB, +0.51% By contrast, the top sectors of the standard S&P 500 index include 20% in technology and 15% in healthcare. The fund also targets about 1% for each of the 100 holdings through regular rebalancing to stay diversified.
There are drawbacks to this method. Tech and healthcare are long-term drivers of outperformance, so you could be left behind in a rally. And a screen for holdings with low trailing 12-month volatility could fail to account for future hiccups. But all told, this Invesco ETF is a simple and affordable way to get defensive without abandoning equities — and based on recent inflows, is among the most popular ETFs off 2019 as a result.
2. Vanguard Megacap ETF (MGC)
Some investors may think it foolish to think that megacap tech companies are risky just because they tend of have a big more "wiggle" in their share price. What could be more stable than shares of Apple, for example, a company with almost $300 billion in the bank?
If you agree with this mindset, then consider the Vanguard Megacap ETF MGC, +1.45% which invests only in the biggest U.S. corporations. In a nutshell, this fund takes the top half of the S&P 500 by market capitalization, with a median market cap of $127 billion for its holdings.
Unsurprisingly, that means a big helping of megabanks such as JPMorganChase JPM, +1.30% along with Big Tech mainstays Apple AAPL, +3.46% and Amazon.com AMZN, +3.07% ; tech represents 22% of this ETF’s total portfolio and financials another 18%.
One could argue that the individual stocks on this list aren't at risk of cyclical troubles even if their industry sectors rise and fall based on economic trends. The wide moats and deep pockets of the stocks in this ETF are sure to count for something.
As is typical, this Vanguard offering sports a rock-bottom cost structure with expenses of just 0.07% annually.
3. FlexShares Quality Dividend Defensive Index Fund (QDEF)
Getting a bit more sophisticated, the FlexShares Quality Dividend Defensive Index Fund QDEF, +1.33% offers a stock-focused approach that could appeal to many low-risk investors given both its defensive bent and a focus on long-term income potential.
Though a bit of a niche fund with just over $350 million in assets, this FlexShares ETF screens the U.S. stock market based on qualitative metrics such as profitability and cash flow. It then looks for stocks with above-average dividends, and a beta of less than 1.0 to indicate shares that are historically less volatile than the broad market. The fund also rebalances its portfolio quarterly to ensure proper diversification.
Collectively, those tactics add up to an approach that is grounded and seeks to minimize volatility through holdings that currently include healthcare mainstay Johnson & Johnson JNJ, +0.36% and megacap tech stock Microsoft MSFT, +2.10%
The fund yields 3.0% at present, and despite its more hands-on approach when compared with traditional index funds is still quite affordable at just 0.37% in expenses annually.
4. iShares MSCI Canada ETF (EWC)
What if you're not willing to sell core holdings of stocks or large-cap equity funds, and simply want to layer in a bit of protection? In that case, consider iShares MSCI Canada ETF EWC, +0.88% . Canadian stocks are a simple and effective way to get defensive and add significant diversification to your portfolio.
For starters, Canada is a developed market that doesn't carry the volatility of many regions across Latin America or Asia. While many investors may think energy and mining stocks dominate the Canadian exchange, in fact it’s a vibrant financial sector that makes up the bulk of the Toronto stock exchange — and, at 40% of total assets, the bulk of this ETFs portfolio as well.
That industry concentration is actually a huge appeal for defensive investors, since Canada is traditionally a conservative place for banks; during the global financial crisis its institutions remained well-capitalized and not a single one was in danger of failing or required a government bailout. A recent IMF assessment concluded that Canada’s banking system is "mature, sophisticated, and well-managed."
Additionally, Canadian stocks offer growth potential, and this iShares ETF is up 15% year-to-date, outperforming the S&P 500.
With a not-so-new version of NAFTA now on the books after negotiations between the U.S. and Canada last year, this is also one of the few regions in the world where there are unlikely to be any trade-related fireworks. That makes EWC a great way to get geographic diversification without the risk associated with other global markets in 2019.
5. iShares Global Healthcare ETF (IXJ)
Another way to add a defensive bent to your portfolio is with one of the most sure-fire sectors out there: healthcare. Consider that in 2018, healthcare became the largest employment sector in the U.S. economy, more than manufacturing and retail. Also consider that modern cures are helping people live longer; Japan and Germany, for example, have more than 20% of their population over the age of 65 according to World Bank estimates. This creates a long-term demographic tailwind for healthcare that is as close to a sure-thing as you can invest in.
There are many ways to tap into this healthcare megatrend. But iShares Global Healthcare IXJ, +0.82% embraces a low-risk approach by focusing on 100 of the biggest healthcare companies, including Pfizer PFE, +1.49% , Swiss pharma giant Novartis AG NVS, +0.43% and U.K. drugmaker AstraZeneca AZN, +1.01% to ensure geographic diversification. More than 60% of the fund is invested in drug companies, but there are a host of equipment and service providers as well, such as Thermo Fisher Scientific TMO, +1.79% .
With a focus on entrenched megacap healthcare companies, it's hard to imagine a future where this ETF sees the bottom drop out. Between the power of demographics and the deep pockets of these global leaders, this iShares ETF has staying power that is incredibly appealing in this challenging market environment.
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