It's been quite the month for the stock market.
Exactly one month ago, the broad-based S&P 500 (^GSPC 1.02%) closed at an all-time high. But over a nearly four-week stretch, ended March 17, the market recorded its most violent swings in history, at least according to the Volatility Index, or VIX. The benchmark S&P 500 has logged seven of its nine largest single-session declines in history, as well as its four biggest single-day point gains, since Feb. 24, 2020. It's worth noting that two of these declines rank among the six largest daily percentage drops in the S&P 500's rich history.
Furthermore, it took a mere 16 trading sessions for the iconic Dow Jones Industrial Average to dip into bear market territory. The next-quickest time frame to push into a bear market was 35 trading days, which occurred during the Great Crash of the Depression Era.
Image source: Getty Images.
While these moves in the stock market have been eye-opening and potentially unnerving, history has shown that big drops like we've witnessed recently have always been a buy signal for investors with a long-term mindset. With the understanding that buying individual stocks might not be palatable given the market's recent volatility, may I suggest the following three exchange-traded funds (ETFs) as smart buys during this stock market plunge.
Vanguard S&P 500 ETF
One of the safest ways to play the market mayhem is to buy into a basket fund that closely mirrors the performance of the benchmark S&P 500. That's why I believe the Vanguard S&P 500 ETF (VOO 1.00%) is a smart and safe way to gain equity exposure.
To begin with, the S&P 500 has a pretty impeccable track record of putting bear markets and stock market corrections in the rearview mirror. There are have been 37 previous stock market corrections in the S&P 500 since the beginning of 1950, all of which were eventually erased by a bull-market rally. If investors held and simply gave the S&P 500's components time to shine, they were handsomely rewarded.
Another key point to note here is that, since there's generally minimal turnover in the S&P 500, and the Vanguard S&P 500 ETF is looking to essentially mirror the make-up of the benchmark index, holding turnover is low. This means management fees (i.e., the net expense ratio) are exceptionally low. Investors are only needing to fork over 0.03% on an annual basis, which is a small price to pay for instant diversification.
As one last plug, this S&P 500-mirroring ETF pays a reasonable 2% yield, which can somewhat help ease nerves and slightly mitigate year-to-date losses.
Image source: Getty Images.
VanEck Vectors Gold Miners ETF
Next, I'd strongly suggest investors consider buying the VanEck Vectors Gold Miners ETF (GDX 0.73%).
Why buy an ETF that tracks gold-mining stocks as opposed to physical gold, you ask? The simple reason is that investors can dig into income statements and balance sheets for mining stocks, and management can increase or reduce production based on prevailing market conditions. Not to mention, publicly traded mining stocks can offer their shareholders a dividend, whereas physical gold offers no yield. A bet on gold-mining companies is essentially a leveraged bet on higher spot gold prices, without the risks typically associated with leverage, such as borrowing money.
In my opinion, I can't recall a more perfect situation for physical gold to appreciate in value over the months and years to come. In no particular order:
- The Fed is pumping liquidity into the economy and expanding the monetary base at a rapid rate.
- Global bond yields are virtually nonexistent, meaning there's little guaranteed income to be made, which'll likely push more investors to buy gold.
- Record volatility and coronavirus uncertainty have pushed investor fear and uncertainty through the roof.
Although gold-mining stocks haven't performed particularly well in recent weeks, the industry is historically at its most lustrous at the tail-end of a recession and during the first 12-to-18 months of a recovery. With little rebound expected in global bond yields anytime soon, physical gold, and more specifically gold miners, are a solid bet to outperform.
Image source: Getty Images.
Vanguard Dividend Appreciation ETF
A third ETF that investors should buy as the market plunges is the Vanguard Dividend Appreciation ETF (VIG 0.10%).
Buying into dividend-focused exchange-traded funds can be an especially smart move considering the long-term track record of dividend stocks. According to a report from J.P. Morgan Asset Management that was published in 2013, publicly traded companies that initiated and grew their payouts between 1972 and 2012 averaged an annual gain of 9.5% over this period. By comparison, non-dividend-paying stocks returned a more pedestrian 1.6% per year over this same time frame. Dividend stocks are critical to building long-term wealth, which is why dividend-focused ETFs are generally a smart choice.
There are three reasons I specifically picked out the Vanguard Dividend Appreciation ETF over the many other dividend ETFs available. For starters, it has a menial net expense ratio of 0.06%, which means you'd get to keep more of the money you're investing.
Secondly, high-yield stocks could be more likely to reduce their dividends in the wake of the coronavirus crisis. In my view, ETFs with more modest yields could be a safer bet during these periods of volatility since modest-yielding companies are less likely to reduce their payouts.
Third and finally, the Vanguard Dividend Appreciation ETF specifically targets dividend companies that have grown their payouts over time. Not only are these companies often time-tested businesses, but their consistency in growing their payouts demonstrates both fiscal prudence and a sustainable growth outlook.
Its 1.9% yield may not wow you, but the Vanguard Dividend Appreciation ETF offers a solid combination of growth and income potential.
