Tracking the S&P 500 has historically been a good move for investors. The index is a collection of the top stocks on U.S. markets and has averaged an annual return of around 10%. But that’s an average that spans decades. There have been some troubling periods along the way, when the index hasn’t performed well at all. For investors in or near retirement, or those who can’t afford to wait out a recovery, it can be stressful when concerns about a possible market crash are heightened.
There is one way you can reduce risk, however, and that may involve not tracking the S&P 500 right now. One key number to focus on when looking at stocks is beta. This shows how closely an investment has tracked the S&P 500. A beta of 1.0 means it largely follows the stock market; the lower the number, the less volatile it is and potentially the more disconnected the investment becomes, suggesting that even if the market is doing one thing, this investment may be doing something else entirely.
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A good example of a low-volatility holding for your portfolio is the Vanguard Utilities ETF (NYSEMKT: VPU), an exchange-traded fund (ETF) that’s focused on top utility stocks. Here’s why this type of investment can be ideal if you’re worried about the stock market right now.
The Vanguard fund proved to be a relatively stable option during the last crash
The Vanguard Utilities ETF has averaged a beta of 0.59 over the past five years. That’s a fairly low beta, which indicates that it is far less volatile than the overall stock market. The trade-off is that you sacrifice some gains in exchange for that safety. While the S&P 500 has risen by approximately 78% in the last five years, the Vanguard Utilities ETF is up by only 38%.
But now consider 2022. That year, the broad index declined by more than 19%, while the Vanguard fund only fell by 2%. It would have done an excellent job of preserving your capital, especially since it also pays a 2.5% dividend.
The ETF is a low-risk investment, and there are many others
The Vanguard Utilities ETF has a low expense ratio of 0.09% and is a great example of a low-risk investment that can help you reduce market risk these days. You can find similar types of investments by focusing on beta when evaluating other stocks or ETFs.
While a low beta doesn’t guarantee an investment won’t decline in value if there’s a downturn, it can, however, be a good gauge of just how risky and volatile it may be.
Should you buy stock in Vanguard Utilities ETF right now?
Before you buy stock in Vanguard Utilities ETF, consider this:
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David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Worried About a Crash? Focusing on This Number Can Drastically Reduce Your Risk was originally published by The Motley Fool