The U.S. stock market continues to hit turbulence. Whether due to concerns over the ongoing trade war between the U.S. and China, increasing media attention on a possible U.S. recession or other economic challenges, it behooves you to make sure that your portfolio is set up to deal with risk while still generating growth and income.
The U.S. economy remains a haven as much of the rest of the major economies of the world are slowing or are headed into recession. Meanwhile, the U.S. Gross Domestic Product (GDP) remains firmly in the positive — with expectations for full year 2019 GDP to be a positive 2.50%.
Meanwhile, inflation remains down and low in the U.S. The Federal Reserve Bank’s preferred gauge of inflation, the core Personal Consumer Expenditure Index (PCE), is running at a scant 1.60% down — from January’s high of 1.77%. In addition, inflation outside the U.S. continues to be low — to the consternation of central banks.
The underpinnings of the U.S. economy remain positive with consumers very much engaged and comfortable to keep spending. This is evidenced by the broad weekly survey results by Bloomberg in its Consumer Comfort Index, which remains up significantly over the trailing year at a current level of 61.50.
But none of that is stopping traders from sending stocks gyrating up and down. Volatility spiked dramatically over the month of August.
This has resulted in the S&P 500 Index being down 4.68% from recent highs in late July of this year.
Meanwhile, U.S. bond yields continue to decline — sending some to suggest that this is representative of a signal of a possible U.S. recession. But instead, as a former bond trader and bond investment manager, I argue that there are substantial reasons for lower yields and higher bond prices. Inflation, as noted above, is low and falling — aiding bond prices. And issuance in the bond market outside of U.S. Treasuries is not keeping up with demand — particularly in corporate bonds and municipal bonds.
In addition, outside the U.S., bond yields for government and corporate issues continues to head deeper into negative territory. This means that bond investors are effectively paying to own bonds. And the market amount of negatively yielding bonds has just reached a new high of just shy of $17 trillion.
This makes the US bond market all the more attractive with the still positive yields in Treasuries as well as corporate and municipal bonds.
Total Amount of Negative Yielding Bonds
Where to Go for Income and Growth
There are specific segments of the markets which continue to deliver during downturns in the general S&P 500 Index. Each of these segments is exclusively or predominantly focused on the U.S. economy and markets, and each has a proven history of sustained and well-defended dividend flows.
And thanks to the vast and seemingly ever-expanding ETF market, there are specific ETFs with successful tracking of the leading defensive segments. And in particular, Vanguard has a great series of ETFs with lower expense costs as well as ample liquidity in the market.
REIT ETFs to Buy
One of the best defensive segments remains the real estate investment trust (REIT) market. REITs continue to fare well during both good and challenging times. The underlying security of real assets which in turn generate ample income to fuel dividend distributions remains a compelling case for investors. And thanks to the Tax Cuts & Jobs Act of 2017, REITs dividends come with a 20% tax-deduction, making the REIT yields even more attractive.
And over the past five years, REITs have returned 55.75% — for an average annual equivalent return of 9.26% as tracked by the Bloomberg U.S. REITs Index.
Vanguard has its Vanguard Real Estate ETF (NYSEARCA:) which has performed mostly in line with the REIT market index with the ETF actually outpacing the Index year to date with a return of 24.72%.
Best ETFs to Buy From the Utilities Sector
Next is the U.S. Utilities market sector. Utilities continue to benefit from lower inflation and interest rates, which reduces their funding costs while also making their dividend yields all the more valuable for investors. And since most utility dividends are qualified — the income tax liability is lower for most investors’ tax-brackets.
Utilities are U.S.-focused and also come with the benefit of regulated rates and profit margins for their general regulated operations. This provides certainty for both good and challenging economic times. And with the U.S. economy remaining in growth mode, demand for many essential services — especially electric power — is on the ascent in the U.S.
In addition, many utilities also run extra non-regulated wholesale businesses ranging from wholesale power distribution and/or transmission or natural gas sales and transmission. This adds to the revenues for dividends as well as fueling additional growth.
Over the past five years, U.S. utilities, as tracked by the S&P 500 Utilities Index, have returned 72.94% for an average annual equivalent return of 11.58%.
Vanguard has an excellent ETF in this market with its Vanguard Utilities ETF (NYSEARCA:). It has kept up and even bettered the market Index over the past five years. And year to date it has returned 18.92%.
ETFs to Buy From the Consumer Sector
Then one of the traditional defensive market segments is the consumer staples market. This is because traditionally, during good and bad economic times consumers and households overall continue spend on the necessities for life. That concept got severely challenged in 2018 as many traditional leaders in this market ran into a buzz saw of changing consumer tastes for packaged and branded goods and costs including transportation rose squeezing margins.
But while many are still challenged to focus on the right products and brands along with cost controls – others have dragged their feet with the market punishing them. That said, the segment has many successful turnarounds including Mondelez (NASDAQ:), Procter & Gamble (NYSE:), Colgate-Palmolive (NYSE:) and even General Mills (NYSE:).
The market segment overall is up 54.23% over past five years for an average annual equivalent return of 9.05% as tracked by the S&P 500 Consumer Staples Index.
Vanguard has a well-run ETF in this segment with its Vanguard Consumer Staples ETF (NYSEARCA:). It has largely kept up with the Index. And for the year to date, the ETF has generated a return of 19.06%. And like for the utility stocks, most consumer goods stocks are tax-advantaged with qualified dividends.
Investing in U.S. Bonds
U.S. Bonds, as noted above, continue to deliver positive yields with rising prices. And with the Fed on track to its money easing policies, including its target rate range for Fed Funds and its bond portfolio activities — the market should be further supported.
There are two segments of the U.S. bond market which you should focus upon. First is the corporate bond market. Yields are down with the rising credibility of issuers (who benefit from the supportive U.S. economy). And with less issuance and strong demand inside and from outside the U.S. — the market is faring well.
The U.S. corporate bond market, as tracked by the Bloomberg Barclays U.S. Corporate Index, has generated a return over the past five years of 25.07%. And for the year to date, the Index has done even better with a return of 14.11%.
Vanguard has an excellent ETF in the corporate bond market with its Vanguard Intermediate-Term Corporate Bond ETF (NASDAQ:). It has fewer longer-term bonds synthetically represented in the ETF which has limited its performance year to date to 13.37%. But this also means that it is less susceptible to yield gyrations going forward.
Then, I come to a favorite market of mine in bonds — municipals. Municipal bonds are benefiting from a series of developments. First, U.S. bond yields overall, including Treasuries, are down. Second, the U.S. economy is doing well — which bolsters tax revenues which in turn is reducing the need for issuance. This, along with better demand from outside the U.S., means rising bond prices. And third, the TCJA limited state and local tax deductions (SALT). This means that investors, particularly in higher taxed states, are ever more eager for more tax-free income.
The U.S. municipal bond market has seen a return year to date of 20.81% as tracked by the Bloomberg Barclays Municipal Bond Index. Vanguard has an excellent municipal bond ETF with its Vanguard Tax-Exempt Bond Index ETF (NYSEARCA:). It has fairly matched the Bloomberg Barclays Index with a year-to-date return of 16.79%.
And since I’ve presented my way to invest in a collection of all-weather ETFs, perhaps you might like to see more of my market research and recommendations for further safer growth and bigger reliable income. For more — look at my Profitable Investing. Click here to learn more:
Neil George is the editor of and does not have any holdings in the securities mentioned above.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.