This has been a year that the investment community will remember for a long time. Aside from dealing with the unprecedented coronavirus disease 2019 (COVID-19) pandemic, Wall Street and investors have contended with the steepest bear market plunge of all time and the quickest rally to new highs from a bear market low in history. In fact, the CBOE Volatility Index, which measures expected volatility in S&P 500 (^GSPC -1.11%) options over the next 30 days, hit its highest level ever in March.
Volatility can be exceptionally scary in the short term, but it historically opens the door for long-term investors to buy great companies at a substantial discount.
Of course, not every investor has the stomach to buy individual stocks, or the time necessary to devote to research. That's where exchange-traded funds (ETFs) come in. An ETF is a security that usually holds a basket of stocks with a certain focus. For instance, if you want to invest in large-cap stocks, consumer staples, or the Brazilian economy, there are ETFs that cater to these desires.
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Given the diversification and breadth that often come with owning ETFs, they can make for smart buys if and when the stock market crashes. Should that come to pass -- remember that the Nasdaq Composite recently fell 10% in three trading sessions -- investors should consider buying these top-tier ETFs.
Vanguard S&P 500 ETF
Although it's about as far from innovative as you're going to get, the Vanguard S&P 500 ETF (VOO -1.04%) is going to get the job done for patient investors over the long run.
As its name implies, this ETF attempts to closely mirror the performance of the benchmark S&P 500. It does so with a net expense ratio of just 0.03%. For a mere fraction of your investment, you can get instant diversification to the 500 companies that comprise the broad-based index.
But why track the S&P 500? The simple answer is that you'll never be wrong, as long as time is on your side. The S&P 500 has undergone 38 corrections of at least 10% since 1950, and it's eventually put each and every one of these moves lower firmly into the rearview mirror. Since operating earnings tend to expand over time, we should expect the major U.S. indexes, like the S&P 500, to gain value.
Best of all, the Vanguard S&P 500 ETF is currently yielding almost 1.9%, meaning these payouts will more than offset the microscopic management expenses associated with this ETF.
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VanEck Vectors Gold Miners ETF
If hedging during a market meltdown is more your thing, consider putting your money to work in the VanEck Vectors Gold Miners ETF (GDX -0.61%).
In my 21 years of investing in the stock market, I've never seen so many catalysts in the sails of gold and gold stocks. We've seen global bond yields plunge. The Federal Reserve had to reassure domestic financial markets that it would keep its benchmark federal funds rate at record-low levels for years to come. At the same time, the central bank is rapidly expanding the money supply as it unleashes unlimited quantitative easing on the markets. All of this implies a weaker U.S. dollar and a much higher gold price.
As for gold mining stocks, many have spent the past five years reducing their net debt, expanding their most efficient or highest-ore-grade mines, and lowering their all-in sustaining costs. In many instances, gold mining stocks have cash operating margins at or above $1,000 per ounce. You could rightly say that the golden age is upon the industry.
Buying the VanEck Vectors Gold Miners ETF will give you exposure to the biggest players producing the lustrous yellow metal, and the 0.53% expense ratio associated with the ETF is almost perfectly offset by the current 0.52% annual yield.
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Global X Cloud Computing ETF
Though high-growth stocks often get throttled during stock market crashes, investors would be wise not to overlook growth trends during a downturn. That's why the Global X Cloud Computing ETF (CLOU -1.42%) could be very appealing during a crash.
It's no secret that the coronavirus pandemic has completely upended the traditional office, forcing many employees to work remotely. This means more emphasis on shared data outside the workplace. But the thing to realize here is that this trend was ongoing well before COVID-19 became a pandemic. Cloud stocks were growing by double-digit percentages across the board. Now, they're just growing even faster.
For investors who lack the ability to really dig into the technical differences between cloud companies, but who nevertheless want access to this exceptionally high-growth space, the Global X Cloud Computing ETF is the perfect solution. You'll pay a reasonably high net expense ratio of 0.68%, but you'll gain exposure to three dozen of the hottest cloud-based businesses on the planet, including Zoom Video Communications, Shopify, Twilio, and salesforce.com, to name a few.
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Legg Mason Low Volatility High Dividend ETF
Finally, investors who want to avoid volatility as much as possible but still want exposure to stocks should consider buying the Legg Mason Low Volatility High Dividend ETF (LVHD -0.39%). That gigantic mouthful simply means this fund buys mature, time-tested companies that pay an above-average yield.
Although the Legg Mason Low Volatility High Dividend ETF has underperformed the broader market in 2020, it's important to understand just how powerful dividend stocks can be. A 2013 report from Bank of America/Merrill Lynch found that public companies initiating and growing a dividend between 1972 and 2012 delivered a compound annual return of 9.5%. By comparison, stocks that didn't pay dividends generated an average annual return of just 1.6% over this same 40-year span. As an aggregate, dividend stocks performed approximately 19 times better than non-dividend stocks between 1972 and 2012.
As of the end of July, the Legg Mason Low Volatility High Dividend ETF had nearly half of its money invested in the trio of utilities, real estate, and consumer staples, with 52% of assets invested in companies with a market cap of at least $25 billion. These might be boring businesses, but boring's just fine considering that many provide necessary goods or services.
With the Legg Mason Low Volatility High Dividend ETF, you can expect an annual net expense ratio of 0.27%, but a current yield of more than 3%.
