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Burned by the Stock Market? Consider These 3 ETFs Instead

If you were lucky enough to avoid any investment losses in a bullish 2021, then 2022 has changed your luck. The S&P 500 (SNPINDEX: ^GSPC) is now down more than 9% year-to-date, a move that played out without any warning. And it may well be moving even lower before all is said and done. It's an uncomfortable outcome for veteran investors, while newcomers to the market may be feeling a mix of horror and shellshock.

If that's mentally where you are at this point, don't sweat it. Market corrections and the occasional soured trade are nothing unusual, and certainly no reason to give up on investing. However, this may be the right time to suggest changing your tack. Exchange-traded funds (or ETFs) can help curb some of the volatility inherent to owning individual stocks, and these three ETFs in particular can offer even more stability.

Invesco S&P 500 Low Volatility ETF

It's a painfully obvious option, but the Invesco S&P 500 Low Volatility ETF (NYSEMKT: SPLV) will indeed limit the severity of the swings that might otherwise shake you out of a stock, or shake you out of the market altogether.

Just as its name suggests, the Invesco S&P 500 Low Volatility ETF aims to be a less volatile holding than an individual equity or even an index-based instrument might be. It mirrors the S&P 500 Low Volatility Index, which consists of the 100 stocks within the S&P 500 that have demonstrated the least mathematical volatility over the course of the past twelve months. It's reconfigured every three months, and as of the most recent rearrangement Procter & Gamble, PepsiCo, and The Hershey Company are its three biggest holdings. The fund is most heavily exposed to consumer staples like these and utilities stocks, which makes sense. Consumers might postpone the purchase of a new automobile and corporations might cancel plans to invest in updated technology. But people are always going to eat, bathe, and keep their lights turned on. That's why these sectors are seen as safe havens in turbulent times, and why the market treats them as such.

Image source: Getty Images.

While still down from its early-January high, the Invesco S&P 500 Low Volatility ETF is only down about 7% versus the broad market's 9% setback. The small spread is the difference between a tolerable tumble and forcing an investor to make an exit at the exact wrong time.

Vanguard Real Estate Index Fund ETF Shares

Real estate is no less volatile than the stock market, even when bundled up in a real estate investment trust (or REIT). Indeed, in certain situations it can be even more volatile than stocks. It's still a means of offsetting stock market sell-offs or individual stock corrections, however, as it doesn't necessarily move in perfect tandem with the stock market.

This isn't always evident, particularly in the short term. The Vanguard Real Estate Index Fund ETF Shares (NYSEMKT: VNQ) has actually lost more ground than the S&P 500 since early January, now sitting 11% below its recent peak. As the graphic below shows us, though, there have been several longer-term stretches during the past ten years when Vanguard Real Estate Index Fund ETF Shares have moved higher while the stock market was moving lower, and vice versa.

VNQ data by YCharts

Sure, both investments have moved higher during the decade in question, but the stock-based index logged considerably better gains. We're only trying to take the edge off the market volatility that ends up rattling investors' psyches, though. A position in the Vanguard Real Estate Index Fund ETF still accomplishes that more often than not. And owners are collecting a dividend of 2.2% in the meantime.

You should also know that the stock's market's strength and real estate's relative weakness over the past ten years are both a bit out of the ordinary.

Invesco Defensive Equity ETF

Finally, consider adding the Invesco Defensive Equity ETF (NYSEMKT: DEF) to your list of exchange-traded funds. In some ways the Invesco Defensive Equity ETF is much like the Invesco S&P 500 Low Volatility ETF, in that it holds companies one would expect to maintain their value even when more aggressive growth stocks aren't. The two funds are different enough, however, that you can own both with no meaningful overlap. AT&T, Allstate, and aerospace and defense contractor Northrop Grumman are the fund's biggest positions right now, yet this ETF's biggest sector exposure is to the healthcare industry.

See, the Invesco Defensive Equity ETF is based on Invesco's Defensive Equity Index, which consists of U.S.-listed large-cap stocks that fit a particular, quantifiable risk-versus-return profile. These standards include a stock's resiliency during turbulent times for the market, as well as consideration of that stock's performance when the market is bullish. Financials, consumer services, healthcare, and industrial contractors typically offer an optimized mix of upside and downside.

The end result is good performance with less volatility. The Invesco Defensive Equity ETF's beta for the past twelve months is only 0.87, meaning the fund has only moved an average of 87% as much -- higher and lower -- as the S&P 500 on a daily basis over the course of the past twelve months. This muted action makes it much easier to hang onto than many other stocks that have been all over the map of late.

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James Brumley owns AT&T. The Motley Fool owns and recommends Vanguard Real Estate ETF. The Motley Fool has a disclosure policy.


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