Rising inflation and interest rates, growing debt, and an ongoing war in Iran have fueled worry about a coming stock market downturn. Rather than trying to time an exit to cash, Motley Fool analyst David Dierking points to three ETFs designed to cushion a portfolio without abandoning a long-term allocation plan.
Inflation is rising, interest rates are climbing, and debt for many is soaring. The Iran war shows no end in sight, adding to a list of economic indicators that point to problems ahead.
Timing a crash is a losing bet
Trying to predict when the next crash will happen is a waste of effort, the analysis argues. Investors who switch everything to cash in anticipation of a downturn are likely to do more long-term damage to their portfolio than good if their timing is wrong.
The better approach, according to the piece, is preparing a portfolio today to cushion potential downside risk without significantly altering long-term asset allocation. That means adding protection through specific fund choices rather than exiting the market altogether.
Three ETFs built for different kinds of protection
The iShares MSCI USA Quality Factor ETF (QUAL) tops the list, built around high-quality companies with strong balance sheets that can weather an economic downturn. The iShares MSCI USA Minimum Volatility Factor ETF (USMV) takes a different approach, using an optimization process that factors in how stocks move together rather than just picking low-volatility names in isolation.
A third option, the Vanguard Intermediate-Term Treasury ETF (VGIT) offers a more traditional equity hedge. Treasury bonds haven't had a strong recent track record, but they are starting to show their traditional opposing correlation with equities again. If a crash occurs, investors are likely to buy government bonds as a safe haven, which could make the fund a timely pick.
According to Motley Fool: "it's always better to choose protection over prediction."
Source: Motley Fool
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