Market Correction: The ETFs I'd Buy Without Hesitation

Despite lots of uncertainty and even some headwinds this year, the stock market continues to set new all-time highs. The benchmark S&P 500 has hit 7,580 as of this writing and is up roughly 10.5% this year. That's pretty impressive, considering concerns investors were starting to express about artificial intelligence (AI) earlier this year, higher oil and gas prices due to the Iran war, and rising bond yields over concerns about the economy.

The market still faces these potential obstacles, and the near-term uncertainty remains. That suggests investors should be prepared for a market correction (a major index like the S&P 500 falling at least 10% from a recent peak). These corrections are actually more common than investors might think.

While long-term investors don't necessarily need to adjust their portfolios, if investors are interested in adding some protection, here are the two exchange-traded funds (ETFs) I would buy without hesitation.

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Schwab U.S. Dividend Equity ETF

The Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) is very popular among investors, and for good reason. The fund is designed to track the total return of the Dow Jones U.S. Dividend 100 Index, so it is very focused on consistent passive income. As of March 31, the ETF had a trailing-12-month distribution yield of 3.44%, which is very solid for dividends and would become even more attractive if interest rates were to come down. SCHD also has a strong track record of growth, having increased its annual dividend every year since its 2011 launch.

SCHD also has a low total expense ratio of just 0.06%, so for every $10,000 one buys of the ETF, the annual fees are only about $6. Interestingly, SCHD has also performed very well this year and is now up close to 17.4% as investors seek quality because of concerns about excessive valuations in the market.

Here are the fund's top 10 holdings by weight:

1. Qualcomm: 6.52%
2. Texas Instruments: 6.09%
3. UnitedHealth Group: 5.11%
4. Coca-Cola: 4.02%
5. Merck & Co: 3.89%
6. Chevron: 3.84%
7. Verizon Communications: 3.66%
8. Procter & Gamble: 3.60%
9. ConocoPhillips: 3.54%
10. PepsiCo: 3.48%

Qualcomm and Texas Instruments are some names in the AI sector. However, the rest of the top 10 are diverse, large-cap companies that have been around a long time and are likely to fare well, or at least react mutedly during a correction.

While SCHD might not deliver strong growth performance in a correction, it should be more stable than the market overall and continue to provide reliable, consistent passive income.

Vanguard Total Bond Market ETF

Another ETF I would buy without hesitation if I were looking to add some protection against a correction is the Vanguard Total Bond Market ETF (NASDAQ: BND).

BND's investment objective is to track the performance of a broad, market-weighted bond index. The fund is designed to provide exposure to taxable, investment-grade U.S. bonds, offers high potential for investment income, is not very volatile, and helps to diversify a portfolio. As of early April, the fund had a high distribution yield of 4.12%.

The expense ratio of 0.03% is even lower than SCHD's. Over 69% of the fund is invested in U.S. government bonds; over 12% in BBB-rated bonds; and just under 12% in A-rated bonds. A bond's rating is linked to a company's debt or a pool of debt from various companies, and investment-grade debt is viewed as higher quality with lower default risk.

Nearly half of this ETF is in U.S. Treasury bonds or agency bonds, such as those issued by government-sponsored entities like Fannie Mae and Freddie Mac. The majority of the portfolio has a maturity of one to 10 years.

Bonds are better protection if a correction is driven by recessionary effects. In this scenario, investors look for quality, and the Federal Reserve may have to lower interest rates to stimulate the economy, which would push bond prices higher.

If a correction is caused by higher bond yields, bond prices would not fare as well, but as long as the bonds are held to maturity, the full principal is returned, so I still think BND will offer good protection in the medium and long term.

Bram Berkowitz has positions in Federal Home Loan Mortgage. The Motley Fool has positions in and recommends Chevron, Merck, Qualcomm, Texas Instruments, and Vanguard Total Bond Market ETF. The Motley Fool recommends ConocoPhillips, UnitedHealth Group, and Verizon Communications. The Motley Fool has a disclosure policy.