Occasionally, Wall Street reminds investors that stocks don't move higher in a straight line. Over the last three weeks and change, this message has been received, loud and clear.
Since Feb. 19, the iconic Dow Jones Industrial Average (^DJI 0.26%), broad-based S&P 500 (^GSPC 0.61%), and growth stock-dominated Nasdaq Composite (^IXIC 0.93%) have respectively lost 8.6%, 10.1%, and 13.7% of their value. You'll note the double-digit percentage declines for the S&P 500 and Nasdaq Composite officially places these two indexes in correction territory.
More often than not, market corrections are driven by fear, uncertainty, and investors' emotions, which is what leads to stocks plunging. Although corrections can challenge investors' psyche, they're also, historically, the best time to put your money to work on Wall Street.
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But you don't have to buy stakes in individual companies to set yourself up for success in the stock market. For more than 30 years, financial institutions have offered investors access to exchange-traded funds (ETFs) as a way diversify or concentrate their portfolio with the click of a button.
An ETF is a security that holds a basket of stocks or bonds. It allows investors to concentrate on a particular investment strategy (growth, value, or dividend), company size (large-, mid-, or small-cap), geographic region, industry, or even index (Dow, S&P 500, or Nasdaq-100). There are more than 3,000 ETFs for investors to choose from on U.S. exchanges alone, meaning there's likely something that fits everyone's investment goals.
With the stock market plunging, capital preservation and modest appreciation is likely what investors have in mind. What follows is a trio of superb and exceptionally safe ETFs to buy right now that can help you weather the storm.
Schwab U.S. Dividend Equity ETF
The first ETF that makes for a genius buy with the Nasdaq Composite and S&P 500 in correction is the Schwab U.S. Dividend Equity ETF (SCHD 0.07%).
As its name gives away, this is an investment vehicle focused on dividend-paying companies. Specifically, the Schwab U.S. Dividend Equity ETF attempts to mirror the total return, less of fees and expenses, of the Dow Jones U.S. Dividend 100 Index.
NYSEMKT: SCHD
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This index is packed with large-cap, time-tested, recurringly profitable businesses, many of which have dividend yields that would be considered high (at least 2X the yield of the S&P 500) or ultra-high (at least 4X the yield of the S&P 500). The Schwab U.S. Dividend Equity ETF's yield is currently above 3.5%!
The reason investors would be smart to consider dividend stocks is because they historically outperform. In The Power of Dividends: Past, Present, and Future, the analysts at Hartford Funds, in collaboration with Ned Davis Research, compared the performance of income stocks to non-payers over a 50-year period (1973-2023). They showed that dividend stocks more than doubled the annualized return of non-payers -- 9.17% vs. 4.27% -- and did so while being less volatile than the benchmark S&P 500.
This track record of outperformance translates to the Schwab U.S. Dividend Equity ETF delivering a 13.13% annualized return since its inception in October 2011. The time-tested businesses this ETF owns stakes in tend to hold up better than the broader market when emotion-driven corrections occur on Wall Street.
To round things out, the Schwab U.S. Dividend Equity ETF has a microscopic net expense ratio of 0.06%. This represents the percentage of your investment that will go toward the cost of managing the fund, less of fee waivers and reimbursements. With relatively minimal turnover for the Dow Jones U.S. Dividend 100 Index, investors don't have to worry about kissing their capital goodbye because of fees.
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Vanguard S&P 500 ETF
A second superb exchange-traded fund that long-term investors, hypothetically, wouldn't have gone wrong with in more than a century is the Vanguard S&P 500 ETF (VOO 0.56%). This is an index fund that attempts to mirror the total return of the benchmark S&P 500.
Whereas the Schwab U.S. Dividend Equity ETF is likely to decline at a slower pace than the S&P 500 during a correction, the Vanguard S&P 500 would mirror its downside (and upside) activity. While this might sound self-defeating, it's a statistically smart move to wager on the S&P 500 climbing over time.
For example, the analysts at Crestmont Research recently updated a data set that examined the 20-year total returns, including dividends, of the S&P 500 dating back to 1900. Even though the S&P wasn't incepted until 1923, the performance of its components was tracked back to the start of the 20th century. This produced 106 rolling 20-year periods of total return data (1900-1919, 1901-1920, and so on, to 2005-2024).
What Crestmont Research found was that all 106 rolling 20-year periods produced a positive total return. In other words, investors would have made money, hypothetically speaking, if they'd purchased an S&P 500 index fund and held it for 20 years, without exception.
NYSEMKT: VOO
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Furthermore, the S&P 500 benefits from economic and stock market cycles being nonlinear. Though recessions and stock market corrections are perfectly normal and healthy, they're almost always short-lived. In comparison, economic expansions and bull markets tend to stick around for years.
The Vanguard S&P 500 ETF has an ultra-low net expense ratio of 0.03%, is yielding a little north of 1.2%, and has delivered a 14.55% annualized return since its inception in September 2010.
iShares 0-3 Month Treasury Bond ETF
The third superb and exceptionally safe ETF that risk-averse investors can buy with confidence right now is the iShares 0-3 Month Treasury Bond ETF (SGOV +0.03%).
While the previous two ETFs are all about stocks, the iShares 0-3 Month Treasury Bond ETF is designed to invest in Treasury bills (T-bills) with maturities of three months or less. There are a number of advantages to investing in an ETF that focuses on short-term T-bills.
To begin with, you're buying an ETF whose portfolio is full of debt instruments that are backed by the full faith of the United States government. Though U.S. national debt is climbing, the federal government hasn't missed a single interest payment or defaulted on its outstanding bond obligations (outside of failing to redeem gold and silver bonds in 1933 and 1968, respectively).
NYSE: SGOV
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Next, you'll receive a monthly distribution with the iShares 0-3 Month Treasury Bond ETF, which is great for income seekers who enjoy being rewarded with frequency. Additionally, the interest income from U.S. Treasury bonds/bills is often exempt from state and local taxation, though interest income will still be subject to federal taxation.
The iShares 0-3 Month Treasury Bond ETF also serves as a fantastic vehicle to park your cash if you prefer to wait out near-term volatility in the stock market. It's roughly 4.9% trailing-12-month dividend yield trounces certificates of deposit (CDs) and high-yield savings rates for virtually all banks and credit unions.
Lastly, its net expense ratio of 0.09% is quite low considering the ongoing purchases of short-term T-bills. While the iShares 0-3 Month Treasury Bond ETF isn't going to outperform the S&P 500 or Nasdaq Composite over the long run, it can provide some short-term protection for risk-averse investors.
