Defensive ETFs can be a safe haven

Shares fell in September, hitting a low for the year on September 23. To borrow a term from the legendary guru investor

Charlie Munger (Businesses, Portfolio), Vice-Chairman of Berkshire Hathaway (BRK.A, Financial)(BRK.B, financiers), this is the time for the “joyful pessimists”.

“Is there such a thing as a cheerful pessimist? Munger said. “This is who I am.”

Pessimists may point to a falling market, but there is always a good time to buy stocks since stocks are not falling at the same time.

While no one likes to see stock prices fall, those losses only happen if you sell. Value investors are likely to ride out the storm and sow the seeds for reaping profits later by buying bargain-priced stocks.

Are there ways for value investors to invest defensively to weather some of the challenges of this volatile time and even make a profit? Consider exchange-traded funds that include bonds. Bond yields are heading higher after the last rate hike by the Federal Reserve, with two-year and 10-year rates hitting highs over the past decade.

Options for adding a few Treasury-linked ETFs to your value portfolio include these, along with two others:

Vanguard Total Bond Market ETF (BND, Financial)

Tracking the performance of the bond index, this low-fee Vanguard ETF is comprised of nearly 50% US government bonds, with the remainder comprised of corporate bonds and securitized bonds. Cash and municipal bonds make up less than 1.5% of the ETF.

SPDR Bloomberg 1-3 Month T-Bill ETF (BIL, Financial)

Short-term treasury bills can protect investors against inflation risks. Added this ETF, which tracks the Bloomberg 1-3 Month US Treasury Bill Index. The 30-day yield of this ETF is 2.23%.

IShares TIPS Bond ETF (POINT, Financial)

Another inflation hedge is this fund from iShares, which tracks a market-weighted index of inflation-protected US Treasury securities that have at least one year remaining to maturity. This fund has a 30-day yield of 6.92%, and the stock is only slightly above its 52-week low of $107.42.

IShares 0-3 Month Treasury Bond ETF (SGOV, Financial)

This iShares ETF is similar to the 1-3 Month T-Bill ETF in that it tracks ultra-short duration securities, but differs in that it tracks a different index. The 30-day yield of this fund is 2.20%.

WisdomTree U.S. Efficient Core Fund (NTSX, Financial)

For every $100 invested in this ETF, $90 is invested in US large-cap stocks and $10 is collateral for US Treasury Intermediate Bond futures. Since bonds offer 6 times the leverage, the exposure is 90% equities and 60% bonds. Equity sectors represented in this fund include technology, healthcare, financials, consumer discretionary and industrials. This fund is also trading just above its 52-week low of $31.43.

I Bonds

As a bonus, here is a defensive option that is not available in an ETF: I bonds.

Since I bonds are only available to individuals, there will be no ETFs based on them. Adjusted for inflation twice a year, I bonds issued until October 31 will yield 9.62%. You won’t see returns on I bonds until you sell them or when they mature. Don’t cash them in for the first five years or you’ll lose three months’ interest.

The benefits of I bonds include high yields and the fact that you won’t be taxed on interest until the bond matures or you sell it. Disadvantages include being limited to purchasing $10,000 per year, plus up to $5,000 through tax refunds. They cannot be part of an Individual Retirement Account because their interest is already tax deferred.

Bargain hunting

Value investors know that fortune hunters can get their start in bear markets. Keep cash on hand to buy stocks in companies that are financially strong and whose stock prices may be low during market turbulence.

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