- Defensive ETFs offer stability and risk mitigation in volatile markets, with sectors like utilities, consumer staples, and healthcare standing out.
- The total returns of some defensive ETFs outpaced the broader market, especially in the short term.
- ETFs like XLU and XLV have shown consistent returns, with XLU up 30.76% over the past year and XLV rising 6.77% year-to-date.
As concerns grow over softening US economic data, persistent inflation, and the potential threat of new tariffs from President Donald Trump, market unease is increasing. Geopolitical tensions, notably the Russia-Ukraine conflict, also contribute to global uncertainty.
In such a volatile market environment, exchange-traded funds (ETFs) are a compelling option for conservative investors due to their diversification benefits, which help mitigate risk. The US stock market has historically shown resilience, with the Nasdaq 100 achieving an annualized return of 17.93% and the S&P 500 delivering 11.51% over the past decade. ETFs can offer exposure to this long-term growth potential.
As a “risk-off” sentiment prevails, funds are increasingly flowing into defensive stocks—typically from sectors that are less sensitive to economic cycles, such as utilities, consumer staples, healthcare, and dividend-paying ETFs.
Below are some ETFs to consider if you prioritize capital preservation and steady income:
1. iShares MSCI USA Minimum Volatility Factor ETF (USMV)
- ETF Focus: USMV tracks the MSCI USA Minimum Volatility Index, targeting large- and mid-cap US stocks with lower volatility compared to the broader market.
- Top Holdings: T-Mobile US Inc (TMUS), International Business Machines Corporation (IBM), Walmart Inc (WMT), Republic Services Inc (RSG), and Cisco Systems Inc (CSCO).
2. The Utilities Select Sector SPDR Fund (XLU)
- ETF Focus: XLU represents the utilities sector of the S&P 500 Index, including companies involved in electric, water, gas, and renewable energy.
- Top Holdings: NextEra Energy Inc (NEE), Constellation Energy Corporation (CEG), The Southern Company (SO), and Duke Energy Corporation (DUK).
3. The Health Care Select Sector SPDR Fund (XLV)
- ETF Focus: XLV offers exposure to the healthcare sector of the S&P 500 Index, including pharmaceuticals, healthcare providers, biotechnology, and health services.
- Top Holdings: Eli Lilly and Company (LLY), UnitedHealth Group Inc (UNH), Johnson & Johnson (JNJ), and AbbVie Inc (ABBV).
4. The Consumer Staples Select Sector SPDR Fund (XLP)
- ETF Focus: XLP represents the consumer staples sector of the S&P 500 Index, covering essential goods like food, beverages, household products, and personal care items.
- Top Holdings: Costco Wholesale Corporation (COST), Walmart Inc (WMT), The Procter & Gamble Company (PG), and The Coca-Cola Company (KO).
5. Vanguard Dividend Appreciation Index Fund ETF Shares (VIG)
- ETF Focus: VIG tracks the S&P US Dividend Growers Index, focusing on large-cap stocks with a strong track record of consistently increasing dividends.
- Top Holdings: Broadcom Inc (AVGO), Apple Inc (AAPL), JPMorgan Chase & Co (JPM), and Microsoft Corporation (MSFT).
Performance Overview (As of February 27, 2025)
Source: Yahoo Finance, Compiled by CGS International
The Health Care Select Sector SPDR Fund (XLV) has performed the best among these defensive ETFs, with a 6.77% total return year-to-date. This performance is driven by consistent demand for healthcare services, with major companies like UnitedHealth Group and Eli Lilly posting strong earnings growth in Q4 2024. Moreover, global fund managers have increased their allocations to the healthcare sector, reflecting optimism.
The Utilities Select Sector SPDR Fund (XLU) saw a strong 1-year total return of 30.76%, a performance partly driven by increasing demand for infrastructure related to artificial intelligence and the global electrification trend.
Conclusion
As market conditions remain unpredictable, defensive ETFs provide a strategic option for investors seeking to safeguard their portfolios in sectors less impacted by current market fluctuations. By focusing on stable sectors like utilities, healthcare, and consumer staples, investors can potentially reduce risk while achieving steady returns.
Disclaimer: Hailey Chung, Manager of Content at ProsperUs, does not own the ETFs mentioned.
