The S&P 500 is currently trading near a historic high, and there are several reasons investors may want to exercise caution right now. First, credit card debt surged to a record $1.129 trillion in the fourth quarter of 2023, reflecting the deleterious impact of inflation on the household economies of many Americans. Eventually, this high debt level could negatively impact consumer spending in a big way.
Second, economic growth is expected to cool off in the second half of the year in response to the Federal Reserve's aggressive rate hikes over the past year. Corporate earnings, in turn, may start to power down later this year.
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Lastly, U.S. presidential elections historically have had a mixed impact on the stock market. While there's no clear pattern, research has shown that the year following an election tends to produce less robust results for stock investors.
One way to protect your portfolio from a possible downturn is to invest in defensive stocks or funds that tend to perform well, regardless of economic activity. Defensively positioned companies tend to offer essential products and services that people need no matter what. Moreover, they also generally pay regular dividends that can cushion your portfolio from the impact of a marketwide decline.
Here are two defensive Vanguard exchange-traded funds (ETFs) that may be top safe havens for your money. These funds are low-cost, diversified within their particular theme, and have a long history of producing strong returns for shareholders.
These Vanguard funds can keep your money safe
1. Vanguard Health Care Index Fund
The Vanguard Health Index Fund (VHT -0.58%) tracks the performance of the MSCI US IMI Health Care 25/50 index, which covers the entire spectrum of the U.S. healthcare sector. The fund holds 419 stocks, and the top 10 holdings account for over 48% of the portfolio. The fund has a low expense ratio of 0.10%, an exceptionally low turnover rate of 4.1%, and a decent dividend yield of 1.3%.
The healthcare sector is one of the most resilient and innovative sectors in the economy. It benefits from the aging U.S. population, rising demand for health services and products, and technological advancements that improve outcomes and efficiency. The sector also has a defensive nature, as people tend to prioritize their health over other expenses in times of uncertainty.
The fund has delivered total returns (assuming dividends were reinvested and before taxes) of 181% over the past 10 years, trailing the S&P 500 by 44 percentage points. To be fair, though, most of the S&P 500's outperformance relative to this top healthcare fund has come in the past 18 months, driven by the exuberance over artificial intelligence.
However, in a bear market scenario, the Vanguard Health Index Fund should outperform this benchmark index due to its ties to medical services and goods. After all, the fund handily outperformed the S&P 500 during the 2022 bear market by 12.5 percentage points.
2. Vanguard High Dividend Yield Index Fund
The Vanguard High Dividend Yield Index Fund (VYM -0.55%) fund tracks the performance of the FTSE High Dividend Yield index, which is composed of companies that pay relatively high dividends. The fund holds 450 stocks, with the top 10 holdings accounting for 24.6% of the portfolio. The fund has an ultra-low expense ratio of 0.06%, a rock-bottom turnover rate of 5.7%, and a generous dividend yield of 3.09%.
The high-dividend-yield space is attractive for income-seeking investors who want to generate steady cash flow from their investments. High-yield dividend stocks also tend to be less volatile than the broader market, as dividend-paying companies, on balance, have stable earnings, strong balance sheets, and predictable revenue streams.
Over the last 10 years, the fund has delivered total returns of 153%, trailing the S&P 500 by 72 percentage points. However, the Vanguard High Dividend Yield Index Fund dramatically outperformed the broader market during the 2022 bear market by 17.6 percentage points, reflecting the enormous hedging power of regular dividend payments.
