The current U.S. stock market environment is marked by speculative extremes, historically high levels of market concentration and sentiment, and record-high valuations.
Such conditions have historically been resolved through a combination of rotational shifts into underperforming areas and sharp corrections that disproportionately impact crowded and overvalued investments.
In response, Warren Buffett appears to be favoring a more defensive approach by allocating capital to lower-risk opportunities with greater long-term potential while also increasing cash holdings. Berkshire Hathaway currently holds a record amount of bonds and cash, having sold all of its S&P 500 cap-weighted ETFs. At the same time, Buffett continues to invest heavily in the undervalued energy sector.
Against this backdrop, the investment team at Flextion explored alternative equity-related strategies designed to mitigate the impact of potential market downturns—whether brief or prolonged.
The funds and ETFs highlighted here prioritize characteristics such as dividends, quality, and non-U.S. exposure, which we believe offer both downside protection and long-term return potential. From a sector perspective, we focused on Health Care, Utilities, and Consumer Staples—areas that have historically demonstrated resilience during market drawdowns, particularly in the aftermath of the 2000 tech bubble.
That said, each of these sectors presents valuation and fundamental risks that warrant consideration.
Consumer Staples
U.S.-centric Consumer Staples strategies are heavily weighted toward Walmart and Costco, both of which are trading at historically high valuations. To improve diversification and reduce concentration risk, we suggest favoring a global Consumer Staples option.
Health Care
U.S. Health Care funds appear attractive, especially if economic growth slows. However, the sector faces regulatory and tariff risks due to the significant U.S. trade deficit in pharmaceuticals and ongoing public-sector cost-cutting efforts.
Utilities
Utilities offer a combination of stable demand and strong dividends, making them a compelling option for downside protection. However, we carefully selected strategies that are less influenced by the AI/data center investment surge, which has inflated valuations in some parts of the sector.
Below, we highlight funds that may provide downside protection while maintaining attractive long-term return potential:
- AQR Large Cap Defensive Style
- SPDR SSGA US Large Cap Low Vol ETF
- WisdomTree Europe Quality Dividend Growth
- Vanguard International Dividend Appreciation Index Fund
- Tweedy Browne Worldwide High Dividend Yield
- Madison Dividend Income
- Fidelity Select Health Care Portfolio
- Rydex Variable Trust: Health Care
- Fidelity Select Consumer Staples
- iShares Global Consumer Staples ETF
- ICON Utilities and Income
- MFS Utilities Series
- DWS Health and Wellness
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