Key Points
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After three straight years of double-digit gains, the S&P 500 is looking vulnerable to a prolonged market correction.
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You don’t need to move to cash for protection. You can pivot to other areas of the market that could do well when stocks fall.
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Bonds would be the obvious choice to counteract stock market risk, but you should also consider other options.
The markets have turned more nervous in 2026. What started out as a rotation out of tech and into more defensive and value-oriented areas of the market has turned into a steeper sell-off of any sector that could be negatively disrupted by artificial intelligence (AI).
The S&P 500 and the Nasdaq-100 indexes haven’t experienced larger pullbacks yet, but it’s easy to see that happening if investor fear takes over. If that happens, investors might want to seek out areas of the market that could excel while U.S. stocks are correcting.
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Here are three of the best Vanguard exchange-traded funds (ETFs) that could do particularly well if stocks head into a bear market or worse.
A yellow road sign that says “Volatility Ahead.”
Image source: Getty Images.
1. Vanguard Extended Duration Treasury ETF
The Vanguard Extended Duration Treasury ETF (NYSEMKT: EDV) would be a clear alternative to stocks in a bear market scenario, although it wouldn’t be considered a low-risk play.
Stocks and Treasury bonds are often inversely correlated, meaning bond prices go up when stocks go down. Long-term Treasuries, however, come with a lot of interest rate sensitivity and that can make them volatile.
But if interest rates go down in a bear market, which often happens because of the demand for the safety of Treasuries and the fact that the Fed usually cuts rates in such a scenario, the share price upside potential is significant.
2. Vanguard Consumer Staples ETF
The Vanguard Consumer Staples ETF (NYSEMKT: VDC) invests in stocks, so it still has downside risk if stocks are plummeting. However, because of their defensive and durable nature, they usually fall less than the S&P 500 in corrections.
In 2022, for example, the Vanguard S&P 500 ETF fell more than 18% for the full calendar year. But this ETF fell less than 2%. It was still a loss, but it would have provided investors a significant amount of downside protection.
3. Vanguard Total Bond Market ETF
The Vanguard Total Bond Market ETF (NASDAQ: BND) would be more of your standard equity portfolio risk hedge. It doesn’t target any specific subsectors of the bond market to try to maximize gains. It simply gives you the full investment-grade market, including corporates, Treasuries, and mortgage-backed securities (MBSes).
As is the case with other bond funds, there is some interest rate sensitivity here, but it’ll be lower than that of the Extended Duration Treasury ETF. But as a tool to counteract the downside risk and volatility of equities in a bear market, this ETF is likely to offer protection, risk mitigation, and potentially some share price gains in the process.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF and Vanguard Total Bond Market ETF. The Motley Fool has a disclosure policy.
