Defensive ETF Strategies to Follow Amid Market Carnage

Wall Street is currently experiencing one of the most severe market sell-offs in many years, triggered by President Donald Trump’s tariffs, which have stoked fears of a trade war and recession. The major indices wrapped up their worst week since 2020, with the S&P 500 Index shedding more than $5 trillion in market value last week after tumbling 10.5% over the past two trading days.

The tech-heavy Nasdaq Composite Index and the small-cap Russell 2000 index slipped into a bear market, reflecting a 20% correction from the latest peak. The Dow Jones dropped almost 8% last week and entered into correction territory. The damage has further aggravated today with massive selling in U.S. stocks for the third day (read: 5 ETFs Withstanding the Biggest Market Drop Since 2020).

Trump unveiled a sweeping 10% baseline tariff on all U.S. imports, effective April 5, alongside significantly higher duties on key trading partners. The new tariffs include a 34% rate on China, 20% on the European Union, 46% on Vietnam, 32% on Taiwan and 26% on India, all set to take effect on April 9. Several of Wall Street’s biggest names are issuing new warnings about the impact of what would be the steepest new set of tariffs in more than a century — a move that is rattling markets and unnerving some of the world's biggest investors. 

In response to this, many Wall Street strategists have slashed their forecasts for the stock market, shifting their outlook for the economy from solid growth to recession risk. JPMorgan is the first Wall Street bank to forecast a U.S. recession in the back half of 2025, following Trump's tariffs. The risk of the global economy falling into a recession has increased from 40% to 60%, according to JP Morgan, while Goldman Sachs increased the odds of a U.S. recession to 45% from 35% in the next 12 months. 

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:

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. VHT has a Zacks ETF Rank #1 (Strong Buy), XLU has a Zacks ETF Rank #2 (Buy) while XLP has a Zacks ETF Rank #3 (Hold) (read: New Tariff Worsens Trade War Fears: 5 Safe Haven ETFs to Buy).

Emphasis on Dividends

Dividend-paying stocks offer a steady income stream and help mitigate potential losses during periods of market weakness. 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 U.S. Dividend ETFs Outperforming Amid Market Turmoil).

iShares Core High Dividend ETF HDV and WisdomTree US High Dividend Fund DHS with a Zacks ETF Rank #3 and 2, respectively, fit well in this category.

Invest in Quality

Quality investing seems to be a solid bet. Quality stocks possess a sustainable competitive advantage and demonstrate consistent growth, profitability and operational excellence over time. These stocks are rich in value characteristics, boasting a healthy balance sheet, high return on capital, low volatility, elevated margins and a track record of stable or rising sales and earnings growth. 

Quality products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. Among the most popular are iShares MSCI USA Quality Factor ETF QUAL, Invesco S&P 500 Quality ETF SPHQ and JPMorgan U.S. Quality Factor ETF JQUA.

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.

Focus on Cash-Like ETFs

Allocating more to cash-like ETFs or short-term bond ETFs can offer stability and liquidity, especially as uncertainty clouds the outlook for equities. These funds invest in ultra-short-term bonds and help investors keep aside money for a couple of weeks to a few months with almost no risk. In times of market downturns, these can act as a hedge, protecting the portfolio from significant losses. 

iShares 0-3 Month Treasury Bond ETF SGOV, SPDR Bloomberg 1-3 Month T-Bill ETF BIL and JPMorgan Ultra-Short Income ETF JPST are some of the most popular options.

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

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