5 Defensive ETF Strategies to Follow Amid Market Meltdown

Wall Street has suffered a brutal market rout, weighed down by ongoing tariff disputes, surging inflation concerns and growing recessionary fears. The meltdown has erased a staggering $4 trillion in market capitalization from the S&P 500 Index, bringing it to the brink of a correction, which is defined as a decline of 10% from its high. The possibility of a government shutdown later this week also added to the chaos (read: Wall Street Bloodbath: Use It to Buy These ETFs).

Further, many Wall Street analysts have raised concerns about stagflation, where growth stagnates, inflation remains high and unemployment rises. JPMorgan (JPM), Goldman Sachs (GS) and Morgan Stanley (MS) have reduced their respective economic growth targets, citing the anticipated effects of restrictive trade and immigration policies.

Traders are betting that the U.S. economy has lost steam and is on the verge of sliding toward a recession. The surveys and sentiment indicators in recent weeks have been soft, underscoring the ongoing weakness in the economy. The tariffs will raise prices for U.S. consumers and dampen economic growth.

PIMCO CEO Mohamed El-Erian told Yahoo Finance that he now sees a 25% to 30% chance of the U.S. economy entering into recession this year, up from a 10% chance seen before the Trump tariff bonanza began. Betting markets are pricing in an increasing chance that the US economy tips into recession, with Polymarket placing the odds that a U.S. recession is officially called by year-end at roughly 40% as of Monday, up from a 23% chance as of Feb. 27.

In such a scenario, investors should bet on defensive investments. A defensive investment minimizes risk and protects the portfolio during market downturns. It typically involves investing in stable, low-volatility stocks that have a history of consistent performance, even during economic downturns.

As such, we have highlighted five such strategies:

Focus on Dividends

Dividend-paying stocks provide a steady income stream and help mitigate potential losses during weaker market periods. These stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis (read: 5 Safe ETF Buying Zones as Global Trade Tensions Escalate).

In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF VIG and iShares Core Dividend Growth ETF DGRO fit well in this category. VIG has a Zacks ETF Rank #1 (Strong Buy) and DGRO has a Zacks ETF Rank #2 (Buy).

Pick Low-Beta ETFs

Beta is a measure of a stock's volatility relative to the market. Low-beta stocks tend to have lower price fluctuations than the market, providing stability during market downturns. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile, while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market.

That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market crumbles. Core Alternative ETF CCOR, with a beta of 0.09, and Innovator Defined Wealth Shield ETF BALT, with a beta of 0.10, could be compelling picks (read: Low-Beta ETFs to Hedge Against Trade War Risks).

Add Value

Value investing is an investment strategy that focuses on purchasing stocks that are undervalued relative to their intrinsic value. Value stocks seek to capitalize on market inefficiencies and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. They are less susceptible to trending markets, and their dividend payouts offer safety in times of market turbulence.

Given this, Vanguard Value ETF VTV, iShares Russell 1000 Value ETF IWD and SPDR Portfolio S&P 500 Value ETF SPYV, having a Zacks ETF Rank #1 or #2, could be excellent picks.

Invest in Defensive Sectors

Certain sectors, such as consumer staples, utilities and healthcare, tend to be less sensitive to economic cycles and more resistant to market downturns. These generally act as a safe haven during political and economic turmoil. Stocks in these sectors generally provide higher returns in troubled times.

Investors seeking exposure to these sectors could find Consumer Staples Select Sector SPDR ETF XLP, Utilities Select Sector SPDR ETF XLU and Vanguard Health Care ETF VHT intriguing. While XLP has a Zacks ETF Rank #3 (Hold), XLU and VHT have a Zacks ETF Rank #1 each (read: Recession Fears Looming? Secure Your Portfolio With These ETFs).

Buy Defined Outcome ETFs

Defined outcome ETFs, also known as buffered ETFs, use options strategies to limit downside risk while capping potential gains. These ETFs are designed to provide a predetermined range of returns over a specific period, offering investors a way to navigate volatile markets with more certainty. FT Vest Laddered Buffer ETF BUFR is among the most popular ones in this space. Innovator U.S. Equity Power Buffer ETFs are also popular options. Innovator offers a series of defined outcome ETFs, each with specific outcome periods and buffer levels.

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This article originally published on Zacks Investment Research (zacks.com).

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