April 13, 2024

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7 Defensive ETFs to Protect Yourself From the Tech Sell-Off

9 min read

For those looking to protect themselves from the tech sell-off — the Vanguard Information Technology ETF (NYSEARCA:VGT) is down 3% over the past month — you can make one simple change to make this happen. Trim your tech holdings. And if you don’t want to do this, some ETFs can reduce the overall risk of your portfolio. 

But first, before I name seven ETFs that will help you accomplish your goal, it’s important to remember that tech stocks were due for a correction. The VGT’s annual total return for the past five calendar years (2016-2020) were 13.8% in 2016, 37.1%, 2.5%, 48.7% and 45.9% in 2020.

A $10,000 investment in VGT five years ago is worth $36,703 today. That’s some success. 

So, it’s not crazy to be thinking that reversion to the mean could be setting in. Or, it could be that tech stocks are taking a breather before making the next leg up. The toughest part about investing is you never really know which it is until it’s too late. 

Nevertheless, as someone who likes to talk about investors always having options, this particular situation is no different. You do have choices available. There are ways to dial down the risk, etc. 

Here are seven ETFs to help you in this regard. 

  • Utilities Select Sector SPDR Fund (NYSEARCA:XLU)
  • Pimco Active Bond ETF (NYSEARCA:BOND)
  • Invesco S&P 500 Equal Weight Health Care (NYSEARCA:RYH)
  • Vanguard Dividend Appreciation ETF (NYSEARCA:VIG)
  • iShares Core S&P Total U.S. Stock Market ETF (NYSEARCA:ITOT)
  • Global X US Infrastructure ETF (CBOE BZX:PAVE)
  • ProShares Short QQQ (NYSEARCA:PSQ)

ETFs to Buy: Utilities Select Sector SPDR Fund (XLU)

Expenses: 0.12%, or $12 per $10,000 invested annually

Investing in utilities might not be sexy, but the regulated nature of their assets makes them a staple for income investors everywhere. I selected XLU for three reasons. 

First, it’s the largest U.S.-listed utility ETF with $11.7 billion in assets under management (AUM). It tracks the performance of the Utilities Select Sector Index, which represents the utilities stocks in the S&P 500. As a result of its S&P 500 connection, it only has 28 holdings. Therefore, you’re getting a quality group of utility stocks. 

I’ve never been tremendously interested in the utilities sector. However, XLU’s largest holding at a weighting of 15.8% is NextEra Energy (NYSE:NEE), a company I absolutely love because of its commitment to renewable energy. It’s why I recently recommended NEE and six other stocks to consider for a greener future. It’s got a huge backlog of renewable energy projects to bring online in 2021 and 2022 to make it even greener. 

My last reason for liking XLU is a combination of low fees and excellent long-term performance. It charges just 0.12% annually and has a 7.52% annual return from its inception in December 1998 through the end of April. 

Unless America figures out how to go without power, XLU makes a whole lot of sense for the conservative investor.

Pimco Active Bond ETF (BOND)

Source: Shutterstock

Expenses: 0.55%

If you’re comparing 2021 inflows between bonds and equities, there’s no comparison. Through April 20, $59 billion flowed into bonds while $240 billion went to equities, CNBC reported. Financial advisors are especially leery of putting their clients’ money into bonds. 

“‘When we talk to advisors, what we hear overwhelmingly is they don’t really want to own bonds at all right now if they can help it,’ said Dave Nadig, chief investment officer and director of research at ETF Trends and ETF Database.”

However, the contrarian in me says that it pays for investors to go the other way when the crowd’s going one way. That said, I’m not suggesting you load up on Pimco Active Bond, but a small weighting will lower your risk exposure. 

As its name suggests, it is an actively managed fund that focuses on higher quality, intermediate-term bonds. It currently holds 1,132 different bonds with an effective maturity of 8.44 years and a 2.32% estimated yield to maturity. 

This means that the average bond in the portfolio will mature in 8.5 years and yield approximately 2.3% annually during this time, assuming its price remains the same over this period. 

You won’t get rich owning BOND, but you ought to sleep a little better at night. 

ETFs to Buy: Invesco S&P 500 Equal Weight Health Care (RYH)

Invesco logo in blue with mountain image

Source: Shutterstock

Expenses: 0.4%

If I could only write about one type of ETF, it would be about those that equal-weight their portfolios. Not everyone is convinced they’re all that and a bag of chips. The biggest argument against them is that the holdings tend to tilt toward smaller stocks and away from the mega-caps that dominate cap-weighted portfolios. 

RYH tracks the performance of the S&P 500 Equal Weight Health Care Index, a collection of 63 health care stocks that are a sub-sector of the S&P 500. They’re rebalanced quarterly to an approximate 1.56% weighting. 

Because RYH is equal-weighted, Johnson & Johns0n (NYSE:JNJ), the largest holding in the cap-weighted Health Care Select Sector SPDR Fund (NYSEARCA:XLV) at 9.66%, only has a weighting of 1.56%. So, if you love JNJ stock, RYH might not be for you. 

How have the two funds done performance-wise? RYH has an annualized total return over the past five years of 14.28%, 46 basis points higher than XLV.  

Is it worth the extra 28 basis points in fees? I think it is. 

However, whether you buy RYH or XLV, the reason to own either of them is we all get sick.     

Vanguard Dividend Appreciation ETF (VIG)

Vanguard logoExpenses: 0.06%

The one thing I’ve learned about dividend investing is that it’s more about dividend growth than it is about the size of the dividend or the yield. Some of the best dividend stocks barely yield 1% but produce spectacular returns from capital appreciation. 

VIG tracks the performance of the NASDAQ US Dividend Achievers Select Index. The index is a collection of stocks that have increased their annual dividend payments for 10 consecutive years or more. They’re not quite in the same league as Dividend Aristocrats — 25 consecutive years increasing annual dividend payments — but they’re clearly committed to returning capital to shareholders.

And let’s face it, at 0.06% — an annual fee of $6 per $10,000 invested — you’re getting an excellent portfolio of 247 dividend-paying stocks whose top 10 holdings account for 31.2% of the $58.8 billion in total assets. 

As for sector composition, 12.9% of the portfolio is invested in tech stocks, so if you’re hell-bent on avoiding tech altogether, this is something to keep in mind before you buy. The top three sectors by weight are industrials (22.1%), consumer discretionary (16.6%), and healthcare (15.2%).

ETFs to Buy: iShares Core S&P Total U.S. Stock Market ETF (ITOT)

Expenses: 0.03%

I was thinking about using Vanguard for ETFs covering the entire U.S. stock market but opted to go with the iShares offering, slotting Vanguard into the dividend ETF instead. 

ITOT is one of iShares’ 25 core ETFs. These are the foundational pieces upon which a successful investment portfolio is built. The ETF tracks the performance of the S&P Total Market Index, which is composed of the stocks from the S&P 500 and the S&P Completion Index. It basically covers every U.S.-listed stock available. 

A cap-weighted ETF such as ITOT is going to be top-heavy. The top 10 holdings account for 21.9% of the portfolio, leaving the remaining 78.1% invested in 3,602 companies. So, if you don’t want to own the FAANG’s and Berkshire Hathaway’s (NYSE:BRK.A, NYSE:BRK.B) as part of your plan to avoid the tech sell-off, you might be barking up the wrong tree. 

In addition, tech stocks account for 25.4% of ITOT’s portfolio. It’s almost double the weighting of healthcare, the next highest sector at 13.3%.  

One possibility is to sell any individual tech stocks you own and replace those holdings with ITOT’s diversified portfolio. However, you’d have to take into consideration the capital gains involved in any move. If this is all happening within a tax-advantaged account, that point is moot.

Global X US Infrastructure ETF (PAVE)

Expenses: 0.47%

If I had to name the best provider of thematic ETFs, my vote would be Global X. The company does an excellent job developing ETF themes that people actually want to own. 

PAVE is a good example of this. The ETF, which Global X launched in March 2017, has grown its total assets to $3.6 billion in just four years. It might not be Cathie Wood-fast, but it’s a pretty good clip.

The ETF tracks the performance of the Indxx U.S. Infrastructure Development Index. The index has a simple goal: to invest in companies expected to benefit from President Joe Biden’s commitment to rebuilding U.S. infrastructure. The index is made up of 100 of the top infrastructure development companies by market capitalization. 

We’re looking at companies operating in construction, engineering, raw materials, and all the other businesses that will be a part of the effort. 

Although 2021 has seen a great deal of attention given to infrastructure investments, the reality is that this is an area that requires ongoing attention. Infrastructure needs, especially in first-world countries, will always be a focus for governments. Sure, the dollar amounts and activity may ebb and flow, but averaged out over an extended period, there’s plenty of work to go around.

The top 10 holdings account for 30.2% of the portfolio. I could easily see myself recommending at least half of the stocks. Naturally, industrials account for 64.5% of the portfolio, with materials a distant second at 22.4%, and technology even farther behind in the third spot at 5.3%.

I think it’s fair to say that PAVE is the best choice of my seven recommendations if you’re trying to protect yourself from the tech sell-off.

ETFs to Buy: ProShares Short QQQ (PSQ)

ProShares logo with tagline reading "the alternative ETF company"Expenses: 0.95%

PSQ is intended to deliver the inverse of the daily performance of the Nasdaq 100 Index. So, if the index is down 5%, it’s up 5%, and so on.

I’ve never been a fan of inverse funds for the same reason that I’m not particularly eager to short stocks. My personality doesn’t allow me to root for someone else’s demise. That doesn’t mean I don’t agree with these tactical investments in certain situations.

If you’ve got a boatload of tech stocks and you don’t want to sell because you think they’ve got excellent long-term potential, but you’re worried about their short-term direction, logic suggests buying an ETF that produces the opposite of an index that has technology and communication services weightings of 47.79% and 20%, respectively, makes exceptional sense. 

Of course, one could argue that you should load up on ETFs with little or no technology exposure to balance your tech holdings. Remember, diversification isn’t just about having more than 10 stocks; it’s also about gaining exposure from other industries and sectors that aren’t correlated to your existing investments. 

PSQ isn’t something I would buy, but that doesn’t mean you shouldn’t.  

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.