5 Defensive ETFs Designed to Outlast Market Downturns — And Why the Current Environment Makes Them Worth Studying

Key Points

Is a stock market correction on the horizon? While no one can predict the future with certainty, a recent survey by the American Association of Individual Investors found that approximately 38% of investors (as of early September) anticipated a decline in the stock market over the following six months. Adding to the concern is the S&P 500‘s elevated valuation: the cyclically adjusted price-to-earnings (CAPE) ratio recently stood at 41.4 — well above its long-term average of 17.4 and approaching the peak of 44 recorded in 1999, shortly before the dot-com collapse.

Rather than attempting to time the market by exiting entirely — a risky strategy even for experienced investors — a more measured approach is to consider exchange-traded funds (ETFs) specifically designed to hold up better during bear markets.

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Market corrections and downturns are inevitable at some point. The ETFs below are built around defensive sectors — businesses that tend to keep generating steady consumer demand regardless of broader economic conditions.

Vanguard Health Care Index Fund ETF

The Vanguard Health Care Index Fund ETF (NYSEMKT: VHT) exemplifies this strategy. Health care is a necessity: people continue to require medical treatment, fill prescriptions, and visit doctors even during economic contractions. This fund holds a diversified portfolio of 417 stocks, with major positions in Eli Lilly, Johnson & Johnson, and UnitedHealth Group. It charges a modest annual expense ratio of just 0.09% — equivalent to $9 per $10,000 invested — and recently offered a dividend yield of 1.5%.

State Street Utilities Select Sector SPDR ETF

The State Street Utilities Select Sector SPDR ETF (NYSEMKT: XLU) carries an equally low expense ratio of 0.08% and recently delivered a dividend yield of 2.8%. The fund focuses on utility companies — names like NextEra Energy, Southern Co., and Duke Energy — of which it currently holds roughly 31. Regardless of economic conditions, households and businesses need reliable access to electricity and other essential utility services.

Vanguard Consumer Staples Index Fund ETF Shares

The Vanguard Consumer Staples Index Fund ETF Shares (NYSEMKT: VDC) targets consumer staples companies, with a recent holdings count of 103, including Walmart, Procter & Gamble, and Coca-Cola. Its annual expense ratio is 0.09%, and its recent dividend yield was 2.1%. Whether the economy is expanding or contracting, consumers will continue purchasing everyday essentials such as household products, beverages, and groceries.

Schwab U.S. REIT ETF

The Schwab U.S. REIT ETF (NYSEMKT: SCHH) provides exposure to real estate investment trusts (REITs) — companies that acquire properties and generate revenue through leasing. These lease agreements often span multiple years or even decades, suggesting that income streams are likely to remain stable. The fund’s expense ratio is just 0.07%, with a recent dividend yield of 2.8%. Among its 117 holdings are Prologis, American Tower, and Realty Income.

Schwab U.S. Dividend Equity ETF

A well-regarded dividend-focused ETF such as the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) also merits consideration. Dividend-paying companies are typically well-established, profitable businesses with relatively predictable cash flows, making them generally more resilient than the broader market. This fund boasts an exceptionally low expense ratio of 0.06% and a recent dividend yield of 3%. Its top holdings among 98 positions recently included Merck, Chevron, and Verizon Communications.

Dividend income is especially valuable during economic downturns: while some holdings may stagnate, companies with a strong track record of dividend payments continue to return cash to shareholders.

Whether the market pulls back this year, next year, or further down the road, these defensive ETFs are positioned to provide both growth potential and consistent income. Investors are encouraged to examine any of these funds that align with their goals.

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