Passive investors looking to put new money to work in markets with a slightly more defensive tilt may wish to consider the many defensive exchange-traded funds (ETF) offerings on the TSX Index. Undoubtedly, the 90-day Trump tariff pause countdown is on. And while tariffs imposed could be far less than what was shown off on Liberation Day (which caused one of the most vicious single-day market sell-offs since February 2020), there’s still quite a bit of risk as a recession could become a reality before autumn arrives. Indeed, some of the more defensively positioned stocks out there may have less explosive long-term upside.
But when it comes to taming bear markets, I view them as essential for those who tend to let market corrections or crashes get to them. Indeed, whenever your health or sleep takes a toll because of a move made in the markets, it’s probably a sign you’re taking a bit too much risk.
In any case, here are two safer ways, in my view, to play the stock market as we await Trump’s next big move in this tariff war.
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BMO Low Volatility Canadian Equity ETF
Whenever volatility strikes, I immediately look to BMO Low Volatility Canadian Equity ETF (TSX: ZLB) as a relative pillar of stability. Indeed, the ZLB is right back to new all-time highs after gaining close to 8% in its very short V-shaped recovery. The rapid rebound and its exposure to some of the most promising low-beta value names make the ZLB one of the passive investments investors would be glad they held when an unforeseen crisis strikes.
Indeed, whether it’s a pandemic, a natural disaster, a financial meltdown, or a man-made crisis in the works (think tariffs), investors need a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP) bedrock that can hold its own better than the market. With a 2.3% yield, a mere 0.61 beta, and impressive newfound momentum, I’d look to the ZLB if you’re looking for resilience amid tariffs.
BMO Covered Call Utilities ETF
What’s better than a Canadian utility ETF when the market falls into a bit of a rut? That would be a Canadian utility ETF that implements a “covered call” strategy to jolt the passive income. Indeed, you’re effectively getting with BMO Covered Call Utilities ETF (TSX: ZWU), a broad basket of utility stocks with the added bonus of premium income generated from the writing of call options against names held within the ETF.
The net effect? You’ll lose some appreciation potential but will get premium income for one’s troubles, which is added on top of the dividends paid out by the ETF’s holdings. Indeed, it’s a worthy trade-off when recession risks are high, market valuations are suspect, and upside could be tougher to come by. In any case, the 7.52% yield is the star of the show. However, the really low 0.6 beta is also an attractive feature for passive investors seeking to ride out the bigger bumps ahead.
The Foolish bottom line
The ZLB and ZWU represent a powerful, low-beta defensive way to ride out a potential tariff recession year. Though their upside could be limited if we are facing a tech-led market melt-up kind of V-shaped rebound, I think the following ETFs offer a terrific risk/reward scenario for those who’ve recently discovered they’re taking more risk than they can handle with their stock portfolio. If I had to pick between the two, I’d go with the ZLB. It’s one of the very few ETFs that are at new highs right now. Its rapid recovery from its 7% April dip goes to show just how well the basket holds up in the face of turmoil.
