By Jeff Reeves, MarketWatch
So far, 2019 has been pretty rosy for investors. The markets are up since Jan. 1, and Corporate America is closing out an impressive earnings season that boasted the fifth-straight quarter of double-digit earnings growth.
Yet while the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.07% is up by about 10% year-to-date, it's important to know the benchmarket index is back it was a year ago and remains more than 5% below its mid-2018 highs even after the recent rally.
That's because many investors are viewing stocks with trepidation lately. While it's tempting to write off such negativity as the latest hysterics from chronically pessimistic perma-bears, the reality is that future U.S. market gains may be much harder to come by.
For instance, the market’s strong track record of earnings growth of more than 10% means this kind of expansion is now the norm. Accordingly, comps are going to get increasingly difficult now that corporate tax cuts and record highs for consumer spending are already priced in. As proof that the outlook may be dimming even if present growth is substantial, research firm FactSet noted the largest round of cuts to Wall Street analysts’ earnings estimates in three years — even as it noted a more than 13% growth rate overall for S&P 500 earnings in the first quarter of 2019 so far.
At the same time, there are signs that U.S. economic growth is flagging — including the lowest reading for Bloomberg's GDP tracker since the 2009 financial crisis. That echoes concerns from earlier this year voiced by the World Bank, which predicted U.S. growth to slow to 2.5% this year and as little as 1.7% next year.
None of this is to say that we should all our stocks, of course. Slower growth is still growth, and even investors primarily concerned with capital preservation should have some equities in a well-rounded portfolio.
Still, these warning signs may hint at the wisdom of taking a slightly more defensive tack with your holdings in 2019. If you're so inclined, here are five rock-solid defensive ETFs to consider:
1. Invesco S&P 500 Low Volatility ETF (SPLV)
If you want a subtle, defensive twist on large-cap equity, the Invesco S&P 500 Low Volatility ETF /zigman2/quotes/201108430/composite SPLV +0.32% is worth a look. For a low expense ratio of just 0.25%, the fund selects the 100 most attractive holdings in the benchmark index after screening for the lowest realized volatility over the last 12 months.
Unsurprisingly, that means a bias towards sleepier sectors; 25% of the fund is in utilities such as Exelon Corp. /zigman2/quotes/205982254/composite EXC +1.05% and about 20% is in real estate stocks including Avalonbay Communities Inc. /zigman2/quotes/201241431/composite AVB -0.20% By contrast, the top sectors of the standard S&P 500 index include 20% in technology and 15% in healthcare. The fund also targets about 1% for each of the 100 holdings through regular rebalancing to stay diversified.
There are drawbacks to this method. Tech and healthcare are long-term drivers of outperformance, so you could be left behind in a rally. And a screen for holdings with low trailing 12-month volatility could fail to account for future hiccups. But all told, this Invesco ETF is a simple and affordable way to get defensive without abandoning equities — and based on recent inflows , is among the most popular ETFs off 2019 as a result.
2. Vanguard Megacap ETF (MGC)
Some investors may think it foolish to think that megacap tech companies are risky just because they tend of have a big more "wiggle" in their share price. What could be more stable than shares of Apple, for example, a company with almost $300 billion in the bank?
If you agree with this mindset, then consider the Vanguard Megacap ETF /zigman2/quotes/207096016/composite MGC -0.0075% , which invests only in the biggest U.S. corporations. In a nutshell, this fund takes the top half of the S&P 500 by market capitalization, with a median market cap of $127 billion for its holdings.
Unsurprisingly, that means a big helping of megabanks such as JPMorganChase /zigman2/quotes/205971034/composite JPM -0.45% along with Big Tech mainstays Apple /zigman2/quotes/202934861/composite AAPL +1.30% and Amazon.com /zigman2/quotes/210331248/composite AMZN +1.42% ; tech represents 22% of this ETF’s total portfolio and financials another 18%.