Position Ourselves With Defensive ETFs During Market Correction

When the stock market is in a correction, some investors consider ETFs that track the S&P 500 or the total stock market. Others may look for biotech or tech stocks.

Market corrections, characterized by a significant decline in stock prices, can be unsettling for even the most seasoned investors. However, Exchange-Traded Funds (ETFs) offer a versatile toolkit to help navigate these turbulent periods.

There are a few things we need to consider when we find which ETFs might work better for us. Here are some steps we might want to assess.

Understand Our Time Horizon, this mean that the longer our investment horizon, the less impact short-term market fluctuations should have

Evaluate Our RIsk Profile, a market correction may amplify losses for investors with high-risk portfolios. We may consider adjusting our allocation to more conservative asset classes.

Broad Market ETFs: ETFs tracking broad market indices like the S&P 500 or the Nasdaq 100 provide diversified exposure across sectors and companies.

Bond ETFs: Incorporating bond ETFs can help offset equity losses during market downturns. Consider ETFs tracking government bonds or investment-grade corporate bonds.

International ETFs: Global diversification can mitigate risks associated with a specific country or region.

Utilities and Consumer Staples ETFs: These sectors tend to be less volatile during economic downturns as they provide essential goods and services.

Healthcare ETFs: The healthcare sector can offer some resilience due to its consistent demand.

One more important thing we might want to do is rebalancing our portfolio periodically, this can help us to maintain the desired asset allocation and prevent excessive risk concentration.

It is important for investors to stay informed, always allow us to keep abreast of market developments, but avoid making impulsive decisions based on short-term news.

Do remember that market corrections are temporary, we should stick to our investment plan, by adhering to our long-term investment strategy could help us to weather the storm.

I personally would consider the expenses and trading volume of an ETF before deciding if it is good for my portfolio.

By being mindful of ETF expense ratios, we could avoid our returns being eroded by it over time.

We need to make sure that ETF we choose has sufficient trading volume, this would help to minimize potential liquidity risks.

IBB is specifically designed to invest in companies involved in biotechnology research, development, and production. This includes companies working on pharmaceuticals, medical devices, and other healthcare technologies.

While focused on a specific sector, IBB still offers some diversification by investing in a basket of companies rather than just a few individual stocks.

As a widely traded ETF, IBB offers high liquidity, meaning it can be easily bought and sold without significant price fluctuations.

The expense ratio for IBB is 0.45%, which is considered relatively low for an actively managed ETF.

Investors who believe in the long-term growth potential of the biotechnology sector can gain targeted exposure through IBB. While focused on a specific sector, IBB still offers some diversification benefits compared to investing in individual biotechnology stocks. IBB provides convenient access to a broad range of biotechnology companies through a single investment.

The biotechnology sector can be volatile, and IBB's performance will be closely tied to the overall performance of the sector. IBB is subject to overall market fluctuations, which can impact its performance regardless of the sector's trends. Changes in government regulations can significantly impact the biotechnology industry and, consequently, IBB's performance.

If we looked at how IBB have been trading during the recent correction, it seem to move uptrend from it previous lows during the rally in December, and it is currently moving out from the 26-EMA, into the space between 12 and 26 EMA, this mean that the bulls attempt to create an upward trend could succeed, if we continue to see market correction.

As for me, this might be a good time to consider this ETF as the price looks quite reasonable with only 0.45% expense ratio for a biotech ETF, the trading volume also highlight the liquidity for this ETF remain promising.

With an expense ratio of only 0.09% and average daily volume of more than 1 million, the Utilities Select Sector SPDR Fund (XLU) can be a compelling choice for investors seeking:

Income Generation: Utilities companies generally offer higher dividends compared to many other sectors. XLU often provides a relatively attractive dividend yield, making it suitable for income-oriented investors.

Lower Volatility: Utilities tend to be less volatile than the broader market. This can be beneficial during periods of market turbulence, as utilities stocks may experience smaller price swings.

Defensive Characteristics: The demand for essential services like electricity and water tends to remain relatively stable even during economic downturns. This can make utilities a more defensive investment option.

Exposure to a Growing Sector: The utilities sector is undergoing a significant transformation with the increasing focus on renewable energy sources.

XLU provides exposure to this evolving landscape.

But this ETF might be affected by the following factors.

Interest Rate Sensitivity: Rising interest rates can negatively impact utility companies, as they often rely on debt financing.

Regulatory Risk: Government regulations can significantly impact the operations and profitability of utility companies.

Sector-Specific Risks: The performance of XLU is closely tied to the overall performance of the utilities sector, which can be affected by factors such as weather patterns and economic conditions.

Though we might see lesser rate cut in 2025, but the possibility of rate cut is still there to bring inflation down, hence, feel that in the long run, the utilities sector should be able to benefit.

If we looked at the technical, we can see that XLU is currently trading above the 200-day period while moving sideways recently as the market grappling on whether Fed would continue with more rate cut in 2025, but I feel that this might be a good time for us to go into this ETF if we want to protect our portfolio for market correction that could happen pretty often this year (2025).

I would think that XLU could be trading higher when we see more rate cut and inflation goes down.

Using defensive ETFs to protect against market corrections can be a valuable strategy for reduced volatility, for the defensive sectors like utilities and healthcare, the stable earnings and cash flows does appeal, the consistent demand for these defensive companies even during economic downturns could support their earnings and stock prices.

Many defensive companies pay attractive dividends, which can provide a source of income and help to cushion the impact of market declines on your portfolio.

We need to understand that these defensive ETFs may underperform during strong market ralles, so it is all about balancing and protecting our portfolio.

Appreciate if you could share your thoughts in the comment section whether you think defensive ETFs could be one way to protect our portfolio in the event of more market correction.

Disclaimer: The analysis and result presented does not recommend or suggest any investing in the said stock. This is purely for Analysis.