Thinking about adding defensive ASX exchange-traded funds (ETFs) to your portfolio right now? I wouldn't blame you.
The past month or so has proved to be a rather brutal reminder that the stock markets don't always go up and to the right. After a very pleasant experience over 2023 and 2024, it's possible that many ASX investors might have forgotten that fact. But it will no doubt be front of mind this March, given that the S&P/ASX 200 Index (ASX: XJO) has lost around 8% over the past four weeks of trading in one of the most volatile periods ASX investors have seen in years.
Owning a market-tracking index fund may suit some investors. But it is always going to be just as volatile as the index it tracks, which might not make it a suitable option for the more conservative or nervous investors out there.
So today, let's discuss three defensive ASX ETFs that investors can buy today to hedge their portfolios against volatility.
Three defensive ASX ETFs to navigate through market volatility
First, we have the BetaShares Global Healthcare ETF (ASX: DRUG). Healthcare stocks are typically some of the more defensive businesses on the market. This makes sense, as the revenues and profits that healthcare companies bring in are not usually affected by the economy. A significant portion of overall spending on global healthcare is funded by the government, further adding to this sector's defensiveness.
DRUG is an ASX ETF that invests in some of the world's largest healthcare stocks, including AstraZeneca, Johnson & Johnson, and Eli Lilly.
This defensive ASX ETF has returned 8.09% per annum since its inception in 2016 and charges an annual management fee of 0.57%.
Next, we have a defensive ASX ETF from provider Vanguard to discuss. The Vanguard Australian Government Bond Index ETF (ASX: VGB) doesn't invest in shares at all. Instead, as its name implies, it holds a range of fixed-interest assets, or bonds, issued by Australian governments and government-owned businesses.
Bonds, particularly those issued by governments, are often favoured by investors looking for conservative, income-producing assets that don't lose value in market crashes. Bonds don't tend to offer the kinds of returns that quality shares do. But if you want to add some defensive qualities to your portfolio, this ETF is another compelling option. VGB has returned an average of 2.59% per annum since its inception in 2012. This defensive ETF charges a management fee of 0.16% per annum.
A Buffett fund?
Finally, we get to the VanEck Morningstar Wide Moat ETF (ASX: MOAT). With this defensive ETF, we're back to stocks. MOAT holds a portfolio of Ameircan-listed companies that are all selected on their perceived possession of an economic 'moat'.
A moat is the term used by Warren Buffett to describe a company's intrinsic competitive advantage, which it can use to ward off competition and protect its profits. This advantage could be a strong brand (perhaps Apple or Coca-Cola), a network effect that nudges non-users into the fold (Facebook), or the ability to offer goods at the cheapest price on the market (Amazon or Costco).
Whilst MOAT's holdings are still stocks subject to the whims of the market, they tend to be strong, mature businesses that are resistant to economic shocks. That arguably makes this fund a defensive ETF.
This ETF's methodology has worked well, with an average return of 15.71% per annum since MOAT's 2015 ASX inception. It asks a fee of 0.49% per annum.
