Investors are riding a wave of optimism, thanks in large part to the S&P 500’s impressive performance, which has seen double-digit gains for the past three years, with returns exceeding 23% in two of those years. However, concerns are mounting over a potential market downturn, spurred by indicators such as the S&P 500 Shiller CAPE ratio and the Buffett indicator, both of which suggest that the market could be overvalued.
In light of these concerns, investors are encouraged to consider strategies that may help cushion their portfolios against potential market volatility. One approach is to invest in certain Vanguard exchange-traded funds (ETFs) that can provide some degree of protection during turbulent times.
The first recommendation is the Vanguard Short-Term Treasury ETF (VGSH). Historically, long-term U.S. Treasuries were seen as a bastion of safety for investors. However, recent analyses, such as one conducted by State Street, indicate that these long-duration bonds may not consistently shield against equity drawdowns. This shift in perception has been underscored by actions from countries like China, which have significantly reduced their holdings of U.S. Treasuries, and Denmark’s decision to divest entirely due to concerns over U.S. government finances.
In contrast, short-term Treasuries are viewed as a safer alternative for those seeking refuge. The Vanguard Short-Term Treasury ETF holds 92 U.S. Treasury bonds with an average duration of just 1.9 years, making it a low-cost option for investors, with an annual expense ratio of only 0.03%. Although it may not deliver substantial profits during a market crash, its 30-day SEC yield stands at approximately 3.6%, offering a safety net for investors looking to minimize potential losses.
The second fund to consider is the Vanguard Total Bond Market ETF (BND). This ETF provides exposure to a broad array of investment-grade bonds, which often see price increases when stock prices decline. Boasting a diverse portfolio of 11,444 bonds, with an average duration of 5.7 years, this ETF primarily invests in U.S. government bonds, comprising around 69% of its total holdings. The remaining portion includes corporate bonds rated BBB or higher, offering a slightly riskier option for investors. The fund’s 30-day SEC yield is an attractive nearly 4.2%, making it a suitable choice for those seeking higher returns while providing a diversification strategy against stock market fluctuations.
Lastly, the Vanguard U.S. Minimum Volatility ETF stands out for its focus on risk mitigation. This ETF employs a quantitative model to select stocks that exhibit lower volatility compared to their peers. The fund currently holds 186 stocks across 10 sectors, including notable companies like Lam Research and Johnson & Johnson. Although this ETF’s exposure to equities means it won’t be immune to market downturns, its lower beta of 0.56 suggests it could experience less severe losses if a crash occurs. With a slightly higher expense ratio of 0.13%, it remains a cost-effective option within the ETF landscape.
In summary, while no investment can guarantee immunity from market crashes, these Vanguard ETFs present strategies that could help mitigate potential losses, positioning investors to navigate uncertain times more effectively.
