published 23 January 2023
Vanguard funds are known as practical tools for the buy-and-hold-forever crowd. Their straightforward strategies, broad portfolios, and generally low costs are conducive to investors who want to sit back and let compounding do the work for a decade or two. But in a pinch, the safest Vanguard funds can also be used to play a little defense – something investors could very well use in the coming year.
The current stock-market downturn is more persistent than the average bear. The S&P 500 has been in bear-market territory since Jan. 3, 2022, giving it a little more longevity than the 330 days the typical bear market lasts. Depending on economic conditions this year – especially if the U.S. does fall into the recession that many experts predict – it could last well into 2023.
“The equity market is currently not a good value proposition unless you believe yields will decline dramatically and earnings will hold up, both of which are significantly unlikely,” says José Torres, senior economist at Interactive Brokers. “The S&P 500 is likely to reach a low of around 3,100 as earnings per share (EPS) sink to $206 and the P/E drops to 15.”
If you’re looking to seek out shelter, here are six of the safest Vanguard funds to own in a bear market. These exchange-traded funds (ETFs) and mutual funds represent some of the most useful defensive sectors and strategies – complete with Vanguard’s below-average expenses. And when applicable, we’ll let you know when these portfolios come in both ETF and mutual fund form.
Just remember the rub when it comes to positioning your portfolio for a bear market: Bear markets eventually end. Indeed, in the same note, Torres says a potential Federal Reserve pivot could drive the market to finish in the black by the end of 2023. And as bear markets come to a close, defensive-minded investments can grind to a halt.
So if you do jump into the safest Vanguard funds for short-term defense, pay attention, and be nimble.
Data is as of Jan. 20. Dividend yields represent the trailing 12-month yield, which is a standard measure for equity funds.
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Vanguard High Dividend Yield ETF Type: Dividend stockAssets under management: $50.3 billion Dividend yield: 3.0%Expenses: 0.06%, or $6 annually on every $10,000 investedAlso available as: Vanguard High Dividend Yield Index Fund Admiral Shares (VHYAX (opens in new tab), 0.08% expenses) The best dividend stocks have historically outperformed their non-dividend-paying counterparts during bear markets. And according to Schwab, high-paying dividend stocks are particularly helpful during recessionary bear markets:
“In every recessionary bear market of the past 50 years, high-dividend-paying stocks have outperformed the overall market, except for the Global Financial Crisis in 2008-09, when financials were forced to eliminate their dividends.”
Why is this? For one, when stocks start to look shaky, and investors have little faith that prices are going to go higher, they look for the other source of returns: income. Also, recessionary environments tend to drive investors into defensive sectors … which often just so happen to sport above-average dividend yields.
Consider the Vanguard High Dividend Yield ETF (VYM (opens in new tab), $108.88), which tracks an index of high-yielding dividend stocks. On a total-return basis (price plus dividends), the S&P 500 has lost nearly 16% since the start of the bear market on Jan. 3, 2022. VYM is almost breakeven.
This Vanguard fund boasts a wide portfolio of 440 high-yielding stocks that collectively pays 3% in dividend yield at present. (That’s a little less than double the S&P 500.) It’s worth noting that, at 20% of assets, financials – not really considered safety plays – are the best-represented sector in VYM. But the traditionally defensive healthcare (16%) and consumer staples (13%) sectors also carry significant weight in the portfolio.
Top dividend stocks (opens in new tab) in the portfolio right now include blue chips such as Johnson & Johnson (JNJ (opens in new tab)), Exxon Mobil (XOM (opens in new tab)), and JPMorgan Chase (JPM (opens in new tab)).
Learn more about VYM at the Vanguard provider site. (opens in new tab)
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Vanguard Health Care ETF Type: Sector (Healthcare)Assets under management: $17.3 billionDividend yield: 1.3%Expenses: 0.10%Also available as: Vanguard Health Care Index Fund Admiral Shares (VHCIX (opens in new tab), 0.10% expenses) As we said in our rundown of the best bear market ETFs, “Only two sectors have put up aggregate positive returns across all bear markets since 1990, and investors should look to ETFs covering those sectors should they smell trouble in the future.”
That top sector is healthcare stocks – which will come as zero surprise to anyone who has had to pick up a prescription or go to the hospital a few times over the past couple decades. A sobering fact: Health expenditures between 2000 and 2020 alone have tripled, to about $4.1 trillion from $1.4 trillion, far outpacing inflation.
And why not? Consumers have no choice. If money’s tight, you can put off buying a VR headset or a trip to the Bahamas, but you can’t exactly go off your medications and avoid the doctor.
The Vanguard Health Care ETF (VHT (opens in new tab), $246.53) is tops among all bear market ETFs period, and it’s certainly one of the safest Vanguard funds to put to use in a bear market. It’s an extremely cost-efficient way to diversify, giving you access to some 420 healthcare-sector stocks for a mere 10 basis points in annual fees. (A basis point is one one-hundredth of a percentage point.)
VHT is market cap-weighted, which means the larger a company is by market capitalization, the more assets the fund will invest in its shares. Thus, mega- and large-cap stocks have the biggest impact on performance, at nearly 80% of the fund’s weight. But you also enjoy some exposure to mid- and small-cap stocks, which allows you to benefit from explosive smaller biotech and biopharma names that can take off on events such as drug-trial results and M&A.
Top holdings are a who’s who of Big Healthcare, including insurer UnitedHealth Group (UNH (opens in new tab)), pharmaceutical names Eli Lilly (LLY (opens in new tab)) and Merck (MRK (opens in new tab)), and medical equipment companies such as Danaher (DHR (opens in new tab)).
Learn more about VHT at the Vanguard provider site. (opens in new tab)
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Vanguard Consumer Staples ETF Type: Sector (Consumer Staples)Assets under management: $6.7 billionDividend yield: 2.4%Expenses: 0.10%Also available as: Vanguard Consumer Staples Index Fund Admiral Shares (VCSAX (opens in new tab), 0.10% expenses) The other sector that has, on average, put up positive returns during all bear markets since 1990 is the consumer staples sector, which is resilient for primarily the same reason as healthcare.
If you’re in a money crunch, you’ll look at a lot of different ways to cut back. You might go to the movies less. You might not go out to restaurants as much. Maybe you’ll pare down your five streaming services to four.
In fact, you’ll look at spending less on just about anything before you cut back on consumer staples such as toilet paper, toothpaste and basic grocery essentials.
That’s why the Vanguard Consumer Staples ETF (VDC (opens in new tab), $187.97) is among the safest Vanguard funds for a bear market. This ETF provides exposure to more than 100 companies that specialize in human necessities. Procter & Gamble (PG (opens in new tab)) tackles everything from facial care to tooshie wipes. Mondelez International (MDLZ (opens in new tab)) sells a bevy of cheap snacks – think Oreos and Wheat Thins – that are mainstays in American pantries. It also holds Walmart (WMT (opens in new tab)) and Costco (COST (opens in new tab)), which sell all of these items.
You’ll also find companies like Marlboro parent Altria (MO (opens in new tab)) and alcohol giant Constellation Brands (STZ (opens in new tab)). While you might not consider cigarettes and alcohol to be “necessities,” people are just as loath to cut back on them as they are other staples.
And VDC, like many Vanguard ETFs, can be had at an absolute song (opens in new tab): Expenses are just 10 basis points per year.
Learn more about VDC at the Vanguard provider site. (opens in new tab)
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Vanguard Global Minimum Volatility Fund Investor Shares Type: Minimum-volatility global stockAssets under management: $262.6 millionDividend yield: 2.5%Expenses: 0.21%Among the most popular ways to fight off a bear market are low-volatility (and minimum-volatility) ETFs.
“What’s the difference?” Low-volatility ETFs evaluate a universe of stocks and pick out the ones that have shown the least volatility over a certain period of time, hoping to create the lowest-volatility portfolio it can. Minimum-volatility ETFs typically try to minimize volatility within a certain benchmark, while still resembling the original benchmark in some way.
For instance, an S&P 500 low-vol fund that picks the 20 lowest-volatility stocks in the index might end up holding nothing but utility stocks. However, an S&P 500 min-vol fund might try to identify low-volatility stocks, but it might be forced to have at least some percentage invested in all 11 sectors – resulting in a portfolio that’s not as volatile as the S&P 500, but possibly not as calm as a low-vol fund.
Vanguard doesn’t have many options for investing in either type of strategy, but one that does its job is the Vanguard Global Minimum Volatility Fund Investor Shares (VMVFX (opens in new tab), $13.65). This actively managed fund aims to provide minimum volatility compared to the global equity market.
A quick reminder: “International” means everywhere outside of the U.S., while “global” means the entire world – which includes the U.S. And like most global funds, VMVFX dedicates a little more than half its assets (55%) to American stocks, with the rest spread across several other countries. Japan is tops at 11%, followed by Canada (6%) and Australia (4%).
From a construction standpoint, VMVFX exemplifies the minimum-volatility mindset. Its sector allocation looks somewhat similar to the category average, but with a few tweaks reflecting its goal of reducing volatility. For instance, it holds a few more percentage points of healthcare (19%) and consumer staples (13%) than the category average, but a little less technology (14%) and consumer discretionary (7%).
If you’re looking for stability, Vanguard Global Minimum Volatility Fund delivers. VMVFX is considered low-risk compared to its Morningstar category (global large-stock blend funds), and its beta of 0.7 implies it’s 30% less volatile than the category benchmark. It’s also been one of the safest Vanguard funds to hold in the current bear market, down just 3% versus a 14% decline for a global market index.
Learn more about VMVFX at the Vanguard provider site. (opens in new tab)
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Vanguard Ultra-Short Bond ETF Type: Ultra-short bondAssets under management: $3.3 billionSEC yield: 4.7%*Expenses: 0.10%We mentioned earlier that when the market’s a mess, investors seek out income. That can include dividend stocks, but it often includes bonds, too.
Listen: Bonds don’t hold a candle to stocks when it comes to long-term returns. But they provide much more stability, serve a vital role in protecting your savings and can produce a decent return from their interest payments.
One of the safest bets you can make in bonds, if you’re just looking to protect your money in a down market, is short-term debt. Typically, the shorter the payback term for a bond, the less uncertainty there is that debt will be paid off – a lot more can happen during the life of a 30-year bond than during the life of a one-year bond.
Also, shorter-maturity bonds have less interest-rate risk. If interest rates go higher, an old bond paying out 20 years’ worth of the old, lower interest rate looks a lot less attractive than a new bond paying out 20 years’ worth of the new, higher interest rate. But that difference isn’t as significant for bonds that only pay interest for a few months.
Enter the Vanguard Ultra-Short Bond ETF (VUSB (opens in new tab), $49.21), which holds bonds that mature in less than two years.
The Vanguard Ultra-Short Bond ETF is an ultimate example of how useful cheap index funds (opens in new tab) are. Individual bonds are extremely difficult to research, and they’re not exactly easy to buy, either. But with VUSB, you’re plugged into a Vanguard-run portfolio of 635 different debt issues – an instant diversified fixed-income portfolio for just 10 basis points a year.
Another reason VUSB is on this list of safest Vanguard funds? Virtually the entire portfolio boasts investment-grade ratings, which basically means there’s an extremely high likelihood that these bonds will be fully repaid. The Vanguard Ultra-Short Bond ETF holds a few U.S. Treasuries and other agency bonds, but the vast majority (roughly 75%) of assets are dedicated to corporate debt from the financial and industrial sectors.
How steady is VUSB? At its worst point during the current bear market in stocks, this ETF declined by only 1.5%. ETFs tracking the ubiquitous Agg bond index lost closer to 16% at their nadirs.
Learn more about VUSB at the Vanguard provider site. (opens in new tab)
* SEC yield reflects the interest earned for the most recent 30-day period after deducting fund expenses. SEC yield is a standard measure for bond funds.
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Vanguard Alternative Strategies Fund Type: Minimum-volatility global stockAssets under management: $97.8 millionDividend yield: 2.5%Expenses: 0.21%Vanguard is many things, but “funky” isn’t one of them.
If you want a basic index fund or a straightforward managed portfolio, Vanguard has them in spades. But despite having such a large roster of offerings – Vanguard says it has more than 200 funds in the U.S. alone – you’re not going to find much (if anything) in the way of leveraged or inverse portfolios, complex smart-beta strategies, even thematic funds.
So in a way, the Vanguard Alternative Strategies Fund (VASFX (opens in new tab), $16.62) isn’t just one of the safest Vanguard funds for a bear market – it’s also a minty-fresh breath of variety.
The actively managed VASFX aims to provide returns that aren’t correlated with the stock market, and less volatility than stocks. And it does so by putting to work a number of alternative strategies that are well outside the Vanguard norm.
Primary among those are long-short strategies, in which a fund will hold both long positions (buys, call options, etc.) and short positions (short sells, put options, etc.) in a particular asset. Indeed, VASFX can go long and short equities, equity indexes, commodities, and even foreign exchange. It can also engage in merger arbitrage (long and short positions to capture risk premium in companies involved in buyouts) and hold long positions in Treasury futures.
It’s complicated – certainly something most of us couldn’t exactly pull off in our spare time – and you’ll pay for the management team’s expertise. The 1.28% expense ratio, while lower than what you’d pay for this kind of fund on average, is the second-highest fee for any Vanguard fund. Though you get what you pay for: VASFX is 3% in the black, on a total-return basis, since the beginning of the bear market.
We’ll be clear, though: This Vanguard fund is not for beginner and/or small-dollar investors. For one, this strategy historically underperforms during bull markets, which means you need to quickly pull the brakes if you think the downturn is about to end. But also, the minimum investment for VASFX is $50,000 – still realistic for some investors that have been saving for a long time, but out of reach for a sizable swath of the investing public.
Learn more about VASFX at the Vanguard provider site. (opens in new tab)
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