3 ETFs That Can Weather Stock Market Volatility

Investing in the stock market often involves facing volatility, especially during a market downturn. Rather than attempting to find specific stocks that may outperform during such times, many investors opt for low-cost index funds that track the entire stock market. The best of these low-cost funds include the Vanguard S&P 500 ETF (VOO), the Vanguard Morningstar Total Stock Market ETF (VTI), and the Schwab U.S. Broad Market ETF (SCHB).

These funds provide exposure to hundreds or thousands of U.S. stocks for a minimal fee, with expense ratios as low as 0.03%.

The stock market has historically been a reliable way for investors seeking long-term growth, but it's essential to accept the short-term risks, volatility, and market fluctuations that come with it. The S&P 500 index, representing the 500 largest publicly traded companies in America, has delivered an average annual return of about 10% over the past 98 years.

The Vanguard S&P 500 ETF (VOO) mirrors this performance, having been available since September 2010 and delivering average annual returns of about 14.9% in the 16 years since its inception.

If you're interested in owning more than just the top 500 largest U.S. stocks, the Schwab U.S. Broad Market ETF (SCHB) offers even greater diversification. It includes 2,394 large-cap stocks, representing the 2,500 largest publicly traded U.S. companies. Since its launch in November 2009, SCHB has delivered average annual returns of approximately 14.3% in the past 17 years.

For those seeking even broader diversification, the Vanguard Morningstar Total Stock Market ETF (VTI) is the answer. It holds a mix of 3,519 stocks, representing the entire publicly traded U.S. stock market, including mid-cap and small-cap companies with growth potential. Over the past 25 years, VTI has delivered average annual returns of about 9.4%, including major stock market crashes and recessions like the global financial crisis of 2008.

While it has a slightly lower return compared to the other two ETFs, VTI's longer track record includes market downturns, making it a more reliable option.

When considering tech stocks, it's essential to note that owning a total stock market index fund like VOO, VTI, or SCHB also means owning the biggest tech names. These funds hold a significant share of tech stocks in the overall market weightings, but this doesn't mean investors are overly exposed to the tech sector. The index funds provide the same weighting to tech stocks as the rest of the market, allowing investors to benefit from the "wisdom of the crowd."

Index funds enable investors to invest based on the idea that the stock market is generally efficient, with stocks priced in real-time based on their real market value and the latest information believed to be accurate by the entire world of investors. As market perceptions change, stock prices adjust accordingly. If the market decides that tech stocks are overpriced, investors will move money into other sectors or themes, such as value stocks or dividend stocks.

Regardless of market movements, index funds will adjust and rebalance, keeping up with these market changes. While these three index funds may experience short-term volatility and serious declines, they are likely to be less volatile than tech-heavy ETFs like the Nasdaq-100 in case of a significant tech stock sell-off. This is due to their broader diversification and reduced tech-heavy exposure.

During the most recent bear market of 2022, these three index funds performed better than the Nasdaq-100, highlighting their resilience during market downturns. Owning low-cost index funds does not guarantee protection from short-term volatility, as investments in these ETFs could still experience value loss. However, this strategy can help investors ride out the storm and potentially avoid significant losses during market downturns.