2 ETFs That Have Held Up Best During Every Recent Market Pullback

When the markets are rising, you might feel like every decision is working out for you, but when they are falling, you want to make sure you have investments that will protect you on the downside. It’s a key element of a diversified portfolio.

Often, investors think they have a diversified portfolio of small caps, large caps, growth, and value, but in reality, when the market tanks, most everything goes down to varying degrees.

That’s why it’s important to find stocks and exchange-traded funds (ETFs) that truly zig when the markets zag — that is, they rise when all the other indexes are falling.

Here are two ETFs built to win when the broader market loses — with a history of doing so during past market pullbacks. You may get sector funds or gimmick strategies that outperform in certain cycles, but these two are broad-market funds that have consistently generated positive returns in down markets.

1. First Trust Morningstar Dividend Leaders ETF

The First Trust Morningstar Dividend Leaders ETF (FDL 0.06%) has a history of not just outperforming during downturns but generating positive returns. In the 2022 bear market, when the S&P 500 (^GSPC +0.58%) fell 19%, FDL gained about 3% for the year. From the beginning of this year through March 30, when the S&P 500 fell 7.3% to its recent low and the Nasdaq Composite (^IXIC +0.91%) was down 10.5%, the First Trust Morningstar Dividend Leaders ETF was up about 15%. That’s significant outperformance.

The ETF tracks the Morningstar Dividend Leaders Index, which uses a proprietary model to screen for stocks with a history of maintaining consistent, sustainable dividends. The roughly top 100 stocks ranked highest in the model are included in the portfolio, weighted by the dollar value of their dividend payments, with certain caps in place. Currently, it holds about 85 stocks.

Currently, the three largest holdings are ExxonMobil, Chevron, and Verizon.

At recent prices, the ETF is up about 15% year to date (YTD) and 25% over the past year on a total return basis, with dividends reinvested. Over the past five- and 10-year periods, it has averaged annualized total returns of 12.5% and 11%, respectively.

2. WisdomTree U.S. High Dividend ETF

The WisdomTree U.S. High Dividend ETF (DHS 0.23%) is another ETF that has consistently outperformed during corrections. In 2022, DHS returned about 4%, which beat the S&P 500 and Nasdaq by a wide margin. This year, through March 30, it was up about 7%, crushing the indexes.

Through May 27, the ETF has returned about 12% YTD and roughly 24% over the past 12 months. Over the past five- and 10-year periods, DHS has average annualized returns of 11% and 10%, respectively, on a total return basis.

This ETF is based on the proprietary WisdomTree U.S. High Dividend Index, which tracks the performance of companies with high dividend yields. The stocks are weighted in the portfolio by the proportionate share of the dividends each company is projected to pay in the coming year. Holdings are also subject to a composite risk score, which looks at value, quality, and momentum.

WisdomTree Trust – WisdomTree U.s. High Dividend Fund

Today’s Change

(-0.23%) $-0.26

Current Price

$112.63

Key Data Points

Day’s Range

$112.53 – $113.09

52wk Range

$93.69 – $114.22

Volume

20.1K

The three largest holdings in the ETF right now are Altria Group, Philip Morris, and AbbVie.

There are obviously ETFs that have performed much better than these two over the years, but the idea of owning these two is to smooth out the total returns in your portfolio when markets go south. There are also sector ETFs, particularly energy sector ETFs, that have performed very well during recent market downturns, but energy markets are cyclical and unpredictable.

Of these two, the First Trust Morningstar Dividend Leaders ETF has been the slightly better, more consistent performer. But both are excellent diversifiers.