Quick Read
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VanEck Retail ETF (RTH) tracks the 25 largest US retail stocks and declined less than the S&P 500 during past recessions.
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Vanguard Consumer Staples ETF (VDC) fell just 4.16% during the 2022 tech rout with 106 of 108 holdings in consumer defensive.
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Schwab US TIPS ETF (SCHP) holds Treasury Inflation-Protected Securities that adjust principal with inflation and could gain from Fed rate cuts.
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Certain AI stocks have been going through an ugly correction as Wall Street sentiment turns cold. ETFs like VanEck Retail ETF (NASDAQ:RTH), Vanguard Consumer Staples Index Fund ETF (NYSEARCA:VDC), and Schwab US TIPS ETF (NYSEARCA:SCHP) can counteract those losses if things get worse. There’s hope that AI stocks will recover, but there’s growing insecurity that the rally has transformed into a bubble and is teetering on the edge of a Dot-Com-esque drawdown.
Even CEOs of certain AI companies themselves are quite confused, with Google’s CEO talking about “elements of irrationality”. However, instead of panicking and selling all your tech stocks, the smarter idea would be to hedge. If you are uncomfortable with how expensive tech stocks are today, you can hold off on buying and start slowly rotating gains into defensive ETFs.
The following three are worth looking into:
VanEck Retail ETF (RTH)
The VanEck Retail ETF tracks the MVIS US Listed Retail 25 Index and gives you exposure to the 25 largest and most liquid retail stocks in the U.S. The ETF is passive and can add significant ballast to your portfolio in case of an AI downturn. It does have Amazon (NASDAQ:AMZN) as its biggest holding with a 20.36% weight, but almost all other holdings are uninvolved in AI.
Amazon itself can be quite insulated, as most of the revenue comes from e-commerce. Profit-wise, AWS dominates and can continue to drive profits even if AI demand collapses. Walmart (NYSE:WMT), Costco (NASDAQ:COST), and Home Depot (NYSE:HD) are among its other holdings.
RTH has seen lower drawdowns during recessions compared to the S&P 500. Plus, it declines less abruptly and can cushion your portfolio. This is thanks to how retail businesses act during downturns. They tend to adapt quickly, with value-oriented retailers seeing increased foot traffic.
RTH has a small 0.70% dividend yield. The expense ratio is 0.35%, or $35 per $10,000.
Vanguard Consumer Staples Index Fund ETF (VDC)
The Vanguard Consumer Staples Index Fund ETF is a passively managed exchange-traded fund that tracks the MSCI US Investable Market Index (IMI)/Consumer Staples 25/50. It gives you broad exposure to U.S. companies in the consumer staples sector.
This sector is particularly defensive in this environment, as staples maintain demand even if AI falters. Consumers are unlikely to cut back on non-discretionary necessities. VDC remained almost untroubled during the 2022 tech rout, as it declined just 4.16%. Naturally, it did decline during 2008 as most stocks did, but that too was just 18.28%.
If a future downturn is driven by tech stocks, VDC should perform like it did in 2022, or even better. The biggest holding here is Walmart at 14.25%, followed by Costco, Procter & Gamble (NYSE:PG), Coca-Cola (NYSE:KO), and PepsiCo (NASDAQ:PEP).
VDC effectively has no exposure to the tech sector. 106 of its 108 holdings are in the Consumer Defensive sector.
VDC comes with a dividend yield of 2.24% and an expense ratio of just 0.09%, or $9 per $10,000.
Schwab US TIPS ETF (SCHP)
Schwab US TIPS ETF tracks an index that gives you exposure to U.S. Treasury Inflation-Protected Securities (TIPS). These TIPS are inflation-protected bonds, meaning the principal adjusts with inflation to preserve purchasing power. At maturity, investors get at least the original principal (if there’s deflation) or the inflation-adjusted value.
You get a monthly income that includes both the coupon interest from the TIPS and the inflation adjustment component that is treated as income in the fund. Because of the way TIPS work, there are two key yield concepts: a nominal distribution yield (what is actually paid out over the past year) and a real yield to maturity (the expected inflation‑adjusted return based on TIPS pricing).
Buying SCHP now can be a good idea, considering the ETF is at a discounted valuation, and interest rate cuts can drive up the valuation. If the economy enters a downturn and the Fed cuts more aggressively, SCHP can end up further in the green.
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