Key Points
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The Schwab U.S. Dividend Equity ETF has the defensive traits needed to weather a bear market.
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The Vanguard Morningstar Growth ETF could be an interesting buy-on-the-dip if stocks falter.
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The iShares Short Duration Bond Active ETF is a safe income bet even if interest rates rise.
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Despite plenty of curveballs thrown at investors this year, the S&P 500 is higher by 11.5%. All things considered, that’s pretty good. Even if the index doesn’t do anything for the remainder of 2026, a gain of 11.5% would be slightly above the long-term average annual increase of 10%.
Still, with 2027 right around the corner, bear market fears are percolating. Maybe it’s just a case of investors being nervous or prudent following an impressive multi-year stretch for equities. On the other hand, bear market fears aren’t entirely unfounded at a time when the U.S. government is cruising toward a divided leadership come January, the war in Iran hasn’t been resolved, and inflation is still too hot for comfort, among other factors.
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Hopefully, a bear market won’t arrive next year, but given the aforementioned factors, investors would do well to adopt “prepare for the worst, hope for the best” mindsets. One way to do that is to build shopping lists of exchange-traded funds (ETFs) that could be worth examining if equities swoon by 20% or more next year. Here’s a trio to consider.
Playing defense with dividends
History shows that during periods of market turmoil, dividend payers perform worse than the broader market. That’s particularly true of stocks in the payout growth category. Alone, that’s a valid reason to consider the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) if the bears are growling in 2027.
Fresh off an all-time high notched immediately after last week’s U.S. midterm elections, this Schwab ETF is proving to investors that it holds up well amid macroeconomic challenges and shifts in political winds. Indeed, the ETF has done just fine over the course of 2026, trouncing the S&P 500 by nearly a 3-to-1 margin.
It’s no secret why this ETF could be a friend to investors during a bear market. For starters, its underlying index — the Dow Jones U.S. Dividend 100™ Index — focuses “on the quality and sustainability of dividends.” There aren’t a lot (if any) yield traps held by this fund.
Second, this ETF allocates roughly 38% of its portfolio to defensive consumer staples and healthcare stocks. Those sectors aren’t guaranteed to rise during bear markets, but decades of market history confirm that those groups usually live up to their protective billing when the broader market falters materially.
One for the risk takers
Owning growth stocks during a bear market may seem counterintuitive. That sentiment would likely be heightened if equities plummet next year, because it’s possible that artificial intelligence (AI)-adjacent growth names may be among the most vulnerable.
Conversely, a significant pullback may be inviting for long-term investors mulling funds such as the Vanguard Morningstar Growth ETF (NYSEMKT: VUG). After all, for as unpleasant as bear markets are, those are often ideal settings for smart investors to dollar-cost average into existing positions or start new ones. So consider this Vanguard ETF a shopping list candidate if a bear market comes to pass.
Another reason this fund merits consideration is the possibility of a 20%-plus drop in the S&P 500. If it’s a recession, growth stocks won’t be immune to declines, but they could prove somewhat resilient. When the economy contracts, profitable companies with strong balance sheets and growing earnings are prized by investors. Those traits apply to many of this Vanguard ETF’s 139 holdings.
Plus, this fund charges just 0.03% in annual fees, or $3 on a $10,000 position, confirming it is inexpensive to own and appealing to buy-and-hold investors.
A bond bet
Market participants often flock to bonds during bear markets, but that isn’t the only reason the iShares Short Duration Bond Active ETF (NYSEMKT: NEAR) is worth a look heading into 2027. This $5.3 billion ETF yields 5%, which is appealing considering its duration is just 2.1 years.
Duration measures a bond’s sensitivity to changes in interest rates, so if the Fed continues hiking rates to ward off inflation next year, this iShares ETF offers some protection against rising bond yields while compensating investors in an attractive fashion.
Something else to consider: If the Fed hikes rates to the point that the economy dips into a recession, it’s worth remembering that bonds are usually one of the best-performing asset classes when economic growth grinds to a halt.
This iShares ETF is actively managed, implying it can navigate fluctuating interest rates more swiftly than a passive rival. It holds 1,979 bonds and charges 0.25% per year, or $25 on a $10,000 investment.
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Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Morningstar Growth ETF. The Motley Fool has a disclosure policy.
