2 Brilliant ETFs I'm Stocking Up On if a Bear Market Is Coming

The market is currently near record levels. In my opinion, it seems that the lessons of the dot-com bubble are being repeated in the realm of artificial intelligence. While predicting the exact timing is uncertain, a bear market is inevitable, and I believe it will arrive sooner rather than later. This is why I have taken a liking to two particular exchange-traded funds (ETFs): Schwab U.S. Dividend Equity ETF (SCHD +0.48%) and Amplify CWP Enhanced Dividend Income ETF (DIVO -0.65%).

SCHD is an ETF that employs a sophisticated screening process to create its portfolio (technically, it follows the Dow Jones U.S. Dividend 100 Index, which uses this screening, but that is a simplification). The initial criteria involve selecting companies that have raised dividends for at least ten consecutive years, with the exception of real estate investment trusts and partnerships.

This is a common practice among dividend investors, but it is not the only step. Subsequently, SCHD determines a composite score based on various factors including free cash flow to total debt, return on equity, dividend yield, and dividend growth. The top 100-ranked companies are included in the ETF, using a market-weighting methodology that caps at 4%.

Essentially, the ETF concentrates on holding a diversified selection of financially robust companies with expanding businesses that offer appealing and growing dividends. While SCHD may experience market fluctuations during a bear market, I am confident that the ETF's portfolio consists of businesses designed to endure challenging periods, allowing me to concentrate on the consistent dividend income rather than the fluctuating price.

On the other hand, DIVO takes a distinct approach by actively managing the portfolio, primarily investing in large, dependable dividend stocks. However, the unique aspect lies in its strategy of strategically selling covered calls on a portion of the portfolio to generate additional income. This approach results in varying dividend income from month to month, currently yielding between 4% and 6% annually.

The most intriguing aspect is that volatility often presents opportunities for selling options, potentially leading to an increase in dividends during a downturn. Upon reviewing its holdings, which consist of approximately 20 to 30 stocks, I find no major concerns. Moreover, similar to SCHD, I can focus on the increasing dividend payments rather than the declining stock prices during a market decline.

I anticipate that the added benefit of potential dividend growth due to the option income overlay will make it easier for me to navigate through bear markets. In my opinion, SCHB U.S. Dividend Equity ETF and Amplify CWP Enhanced Dividend Income ETF are ideal for long-term investment, even when faced with short-term market fluctuations that can evoke high emotions on Wall Street.