Forgotten Dividend ETFs Shield Market Crash

Let's get straight to the point. Your portfolio might have taken a significant hit recently. Mine certainly felt the turbulence – a sharp drop on Friday alone was a stark reminder of market reality. It can be unsettling.

Insights

• Market downturns are normal; view them as opportunities to buy quality assets at lower prices.
• Dollar-cost averaging into low-cost index funds like S&P 500 ETFs (VOO, SPY) forms a solid core for long-term beginners.
• Dividend ETFs like SCHD offer income and potentially lower volatility through exposure to established companies.
• Global diversification via ETFs like VT or Canadian all-in-one funds (ZQT, VEQT) spreads risk beyond the US market.
• Assess your true risk tolerance during downturns and consider adding defensive assets (bonds, cash equivalents) if needed.

Understanding the Current Climate

The S&P 500 has seen considerable volatility, and the NASDAQ has certainly experienced sharp corrections. Feels grim, doesn't it?

But here's the perspective gained from navigating these market conditions for over two decades: this isn't just normal – it's part of the deal. This is the cost of entry for participating in the equity markets.

It might sound counterintuitive, but I've learned to see these chaotic periods differently. Why? Because within the noise and the negative numbers lie chances. Chances to acquire solid assets at better prices. That’s the long game.

Your Strategy During Market Downturns

So, what's the plan when markets are in turmoil? Sell everything? Go hide?

Absolutely not.

My approach stays the same, consistent. It’s the strategy I use week after week: dollar-cost averaging. This means making automated buys into the same core funds, every single week. No emotion, just discipline.

This strategy is grounded in the principle that consistent participation in the market over time, rather than trying to perfectly predict its peaks and valleys, is what builds wealth. It demands patience. It demands conviction. History shows it rewards those who stick with it.

"Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes."

Jack Bogle Founder of The Vanguard Group

The Bedrock: Your S&P 500 Anchor

Where do you start building, or reinforcing, your portfolio? For most people, especially if you're relatively new to investing, the foundation is an S&P 500 fund.

Consider Vanguard's VOO. It makes up a significant portion – about two-thirds – of my own holdings. But VOO isn't alone. State Street offers SPY. In Canada, you have options like VFV or ZSP. Different providers, same fundamental idea: tracking the 500 largest companies in America.

What are you actually buying? You're getting ownership in Apple, Microsoft, Nvidia, Amazon, Alphabet (Google), Meta (Facebook), Berkshire Hathaway, Broadcom, Tesla... and the list goes on. Those are just the top ten players. You gain exposure to all 500.

It’s basically a bet on the broad US market. But you need to understand the current composition. Technology – including the large-cap names often grouped as the "Magnificent Seven" or formerly "FAANG" – holds significant weight, making up roughly 30% of the index as of recent data. That's a substantial concentration, something to be aware of.

Still, compared to many global markets, the US remains quite diverse. You get pieces of communication services, consumer discretionary spending, financials (big banks, insurance companies), healthcare, and more. Historically, it's been a major center of innovation and economic growth.

Yes, markets are choppy now. We have experienced periods like this before. We will experience them again. But zoom out. Look at the bigger picture.

Over the long term, an index like the S&P 500 has historically delivered average annual returns somewhere in the range of 7% to 10%. Some years are spectacular, others are painful. Extend your timeline, and that's the kind of return profile you're generally looking at.

You might see funds advertising higher "since inception" returns, perhaps 14% or more. That sounds great, but it often depends heavily on when the fund started. Rely on long-term averages for setting realistic expectations.

The real advantage of these core funds? They are incredibly inexpensive. VOO currently charges an expense ratio (the annual fee) of just 0.03%. What does that mean in plain English?

For every $10,000 you invest, you pay only $3 per year in fees. These fees are automatically deducted from the fund's performance, so you don't get a separate bill. It's remarkably efficient.

For most investors building a long-term portfolio, exposure to the US market via an S&P 500 fund should be the cornerstone of their stock allocation. It’s the world's dominant market, home to many of the largest and most influential companies.

Dividends: Your Income Stream in the Storm

Now, let's discuss dividends. If you like the idea of getting paid while you hold an investment – and who doesn't? – dividend-focused strategies can be particularly appealing, especially when markets get rough.

Why? Companies that consistently pay dividends tend to be more mature, established businesses. Think stable cash flows and stronger financial foundations. This often results in less severe price drops during market crashes and potentially quicker recovery times. Data often shows dividend payers exhibit more resilience.

Critically, if these companies maintain their payouts (which high-quality dividend payers usually strive to do), you're generating income even if share prices are fluctuating. That cash flow can provide comfort during volatile periods, helping you maintain your investment discipline.

A well-regarded fund in this category is the Schwab US Dividend Equity ETF (SCHD).

SCHD aims to track the Dow Jones US Dividend 100 index. It holds about 100 US stocks selected for their history of paying dividends, dividend growth, and financial strength. Think names like Broadcom, AbbVie, Home Depot, Merck, Chevron, Coca-Cola, Verizon, and PepsiCo (holdings can change, always check the latest). It focuses on quality, not just the absolute highest yield, seeking companies with strong track records.

Look inside SCHD, and you see a different sector mix compared to the S&P 500. Technology currently makes up a much smaller portion, perhaps around 8-10%, versus the S&P's 30%. Instead, SCHD has larger weightings in financials, healthcare, industrials, and consumer staples – sectors often considered less volatile and more defensive.

And the payout? As of early May 2025, SCHD's dividend yield is around 4.06%. That's a solid income stream deposited into your account.

The cost? Also very low. The expense ratio is just 0.06%. That's $6 per year for every $10,000 invested.

For those seeking even higher yields, other ETFs exist, like the Invesco KBW High Dividend Yield Financial ETF (KBWY) yielding over 10%, or Xtrackers S&P High Dividend Yield ETF (XSHD) around 8%, or Nuveen Dividend Growth ETF (NUDV) near 6% (as of early May 2025). Keep in mind, higher yields often come with different risk profiles or sector concentrations (like KBWY's focus on financials), so understand what you're buying.

For Canadian investors, the Hamilton US Dividend Index ETF (SMVP) is often compared to SCHD. It focuses on US companies actively growing their dividends and trades in Canadian dollars, which avoids currency conversion costs and complexities for Canadians.

While I view an S&P 500 fund like VOO as the default core holding for many, if I had to pick a personal favorite ETF concept right now? The idea behind SCHD – owning quality dividend stocks for the long haul – is compelling. It feels particularly appropriate when market conditions are uncertain.

Beyond Borders: Going Global

So far, our focus has been heavily on the US market. But what if you want broader diversification? What if you believe growth opportunities exist outside the United States?

This is where a fund like the Vanguard Total World Stock ETF (VT) comes into play.

VT seeks to give you exposure to essentially the entire global stock market – encompassing both US and international companies. It does this efficiently, with a current expense ratio of just 0.07%.

How broad is it? We're talking exposure to nearly 10,000 different companies across developed and emerging markets worldwide. Buying VT could theoretically represent your entire stock portfolio in a single ticker symbol.

Let's look at the geographic distribution. North America, primarily the US, still constitutes the largest portion – around 63% according to recent data (always check the latest allocation).

But you also gain significant exposure to Europe, the Pacific region (like Japan and Australia), and emerging markets. You'll find holdings in Japan, the UK, China, Canada, France, Switzerland, Germany, India, Taiwan, and many others.

The top individual holdings still mirror the S&P 500 giants: Apple, Microsoft, Nvidia, Amazon, etc. The sheer size of the US market means its largest companies heavily influence global indices too.

So why consider VT? Diversification and simplicity. Some investors prefer an all-in-one global solution rather than managing separate US, international developed, and emerging market funds. VT handles that allocation for you.

Some market analysis suggests that non-US developed markets might benefit from easing monetary policies potentially unfolding through 2025 and beyond. Emerging markets could also receive a boost if interest rate cuts stimulate global economic activity. VT positions you to potentially capture some of that upside outside the US, though performance is never guaranteed.

The Canadian alternative? Look at funds like BMO's ZQT (BMO Growth ETF), Vanguard's VEQT (Vanguard All-Equity ETF Portfolio), or iShares' XEQT (iShares Core Equity ETF Portfolio). I hold ZQT myself. These are often called "asset allocation ETFs" or "all-in-one" funds.

They typically hold a basket of other ETFs to achieve global diversification. ZQT, for example, might have around half its assets in US stocks, but also holds significant Canadian and international positions. It's structured as a "fund of funds."

The fee is slightly higher, exactly 0.20% for ZQT, reflecting the cost of the underlying funds it holds. These Canadian all-in-one funds usually have a larger allocation to Canada compared to a global fund like VT. If you're American, VT is likely the simpler, more direct way to get global exposure; you probably don't need the specific Canadian emphasis of ZQT.

These global funds offer a straightforward path to worldwide diversification. One fund, thousands of companies, job done.

Defense Wins Championships - Beyond Stocks

Everything we've discussed so far involves equities – stocks. That's where the primary potential for long-term growth lies. But holding 100% stocks isn't suitable for everyone, especially when downturns arrive and portfolio values drop sharply.

These sell-offs serve as a harsh, but useful, reality check. Can you truly handle the level of risk you thought you could? Is your portfolio aligned with your actual tolerance for seeing negative returns?

This is where other types of assets enter the strategy – the defensive part of your portfolio. Think fixed income (bonds), cash, or high-interest savings accounts. These aren't designed for explosive growth. Their role is to hold their value better, provide stability, and preserve capital when stock markets are falling.

Consider bonds. While stocks might be experiencing sharp declines, certain bond investments can hold up much better, or even rise. Long-term US Treasury bonds, for example, sometimes exhibit negative correlation to stocks – meaning they tend to move in the opposite direction during times of stress. This can cushion the overall portfolio decline.

You don't need to pick individual bonds. Broad aggregate bond ETFs bundle hundreds or thousands of bonds (government, corporate, etc.) together, offering diversification within the fixed-income world.

Looking for income with potentially less price fluctuation than dividend stocks? Specialized ETFs now exist. For instance, some use covered call strategies on conservative assets like Treasury bonds to generate higher income streams (e.g., the Canadian-listed HPYT was an example of this approach).

While the stock market might be down significantly, funds employing such strategies might hold relatively steady and continue paying distributions. This can be attractive for retirees or anyone realizing they were too heavily weighted in stocks.

Even simpler options exist. Cash-equivalent ETFs or high-interest savings ETFs provide safety and liquidity, earning a modest yield while you wait for market opportunities or simply need a financial buffer.

These aren't just secondary considerations; they are vital components for building a resilient, all-weather portfolio tailored to your specific risk tolerance. If the recent market volatility has caused you significant stress, it might be time to seriously evaluate your allocation to these more conservative assets.

A Word on Advanced Tactics & Contrarian Thoughts

For investors seeking more explicit protection against severe downturns, specialized "tail-risk" or "black swan" ETFs exist (funds like TAIL or CAOS have aimed to fill this niche). These typically use options strategies designed to generate large profits during sudden, sharp market crashes.

The trade-off? They usually lose money gradually during bull markets or periods of low volatility because of the ongoing cost of maintaining those protective options positions. Think of it as expensive portfolio insurance.

Some systematic investment strategies dynamically adjust allocations between stocks and bonds based on predefined market signals or volatility measures.

Research into approaches like risk parity or trend following (sometimes discussed under various model names like the conceptual "ROAR" portfolio mentioned in some circles) suggests potential for improved risk-adjusted returns and smaller drawdowns compared to static buy-and-hold allocations. These require discipline, understanding the methodology, and potentially more active oversight.

However, let's inject a necessary dose of skepticism. While historical patterns are useful guides, they aren't guarantees for the future. Some argue that current conditions – persistent inflation pressures, complex geopolitical risks, potential shifts in global trade – could mean the traditional diversification benefits between stocks and bonds might not operate as smoothly as they have historically. Maintaining an open and critical perspective is crucial.

Analysis

The core message for beginners navigating market turbulence in 2025 remains grounded in fundamentals. While the headlines scream crisis, the underlying strategy for long-term success hasn't fundamentally changed. The key is shifting perspective from fear to opportunity.

Dollar-cost averaging into broad market ETFs like VOO provides systematic exposure to US growth potential at progressively lower prices during downturns. Adding a quality dividend ETF like SCHD offers a psychological buffer through income generation and exposure to more defensive sectors, potentially smoothing the ride.

Global diversification via VT or similar all-in-one funds acknowledges that growth opportunities aren't confined to US borders and helps mitigate single-country risk.

The real test of a downturn isn't predicting the bottom, but assessing if your portfolio aligns with your actual risk tolerance. If volatility causes unbearable anxiety, incorporating bonds or cash equivalents isn't a sign of weakness, but prudent risk management.

Advanced strategies exist, but for most beginners, sticking to a disciplined plan with low-cost, diversified core holdings is the most reliable path through market storms and towards long-term wealth accumulation.

Final Thoughts - Prepare, Don't Panic

Market downturns feel unpleasant. Seeing the value of your investments decrease on screen is naturally unnerving. But remember, volatility is the admission fee for the potential long-term rewards offered by equity markets.

The game plan is straightforward, but it demands discipline:

• Maintain Perspective: Keep your long-term goals in focus. Don't let short-term market noise force you into poor decisions.
• Stay Invested (and Keep Investing): Dollar-cost averaging into quality, low-cost funds like those discussed generally works over extended periods. Market dips become opportunities to acquire more shares at lower prices.
• Know Yourself (and Your Portfolio): Use this period to honestly evaluate your tolerance for risk. Is your mix of stocks, bonds, and cash truly aligned with your ability to handle volatility? Adjust if needed, perhaps by increasing your allocation to more defensive assets.
• Focus on Costs: Keep expense ratios low. Fees erode returns over time, just as returns compound. Choose efficient funds.
• Diversify Wisely: Whether using an all-in-one fund or building with individual ETFs, ensure you have appropriate diversification across different asset types and geographic regions.

While some investors are making rash decisions driven by fear, strategic investors are reviewing their plans, ensuring their defenses are adequate, and preparing their capital for the opportunities that inevitably emerge from market dislocations.

This isn't about perfectly timing the market bottom – an impossible task. It's about having a solid, pre-defined strategy that allows you to withstand the turbulence and benefit from the eventual recovery.

Stay rational. Stick to your strategy. Market volatility is temporary. Be prepared for what lies ahead.

Did You Know?

During the sharp market decline in early 2020, the S&P 500 fell roughly 34% from its peak. However, by the end of that same year, it had recovered all its losses and finished the year with a gain of over 16%. This highlights how quickly markets can rebound and the potential cost of panic selling during downturns.

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Disclaimer: This article is for informational purposes only and does not constitute financial advice or a recommendation to buy or sell any specific securities. Investing involves risk, including the potential loss of principal. Past performance is not indicative of future results. Consult with a qualified financial advisor before making any investment decisions. The author may hold positions in some of the securities mentioned.