2 Quality ETFs With Defensive-Minded Strategies

When investors think about playing defense with their portfolios, they generally gravitate towards areas of safety such as bonds or cash. Those asset classes can be beneficial during a market sell off, but there are also opportunities in defensive-minded stocks to consider as well.

The Guggenheim Defensive Equity ETF DEF is one strategy designed to select a basket of quality stocks with characteristics of outperformance during bear markets. DEF tracks the Sabrient Defensive Equity Index, which selects 100 publicly traded companies based on a number of fundamental qualities.

These characteristics include: relative valuation screening, conservative accounting practices, dividend history and stable price action during periods of market contraction. The goal is to produce a diversified mix of stocks that hold up better than their peers during a downturn, while participating in up cycles as well.

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Each of the holdings in this defensive ETF are equal weighted, which gives stocks with smaller market float the ability to have a stronger pull on the performance of the fund.

Last year, DEF returned 13.18 percent and carries a beta to the market of 0.64. Beta is a measure of a funds sensitivity to a particular index such as the S&P 500. In this case, DEF has much lower overall volatility than the broad market.

The FlexShares Quality Dividend Defensive Index Fund QDEF is another variant on this theme with the goal of selecting a broad mix of dividend stocks. QDEF uses a quality scoring system to target over 200 companies with a lower beta and higher yield than the overall market.

This ETF has a 30-day SEC yield of 2.73 percent and gained 13.63 percent last year. QDEF has more than $170 million in total assets and charges a modest expense ratio of just 0.37 percent.

Both of these ETFs have started 2015 on the right foot by continuing to show positive momentum despite the uptick in volatility that has reverberated through the markets.

The ETFs certainly warrant further scrutiny for investors that are considering a more conservative mindset with their equity portfolio this year.