If a Bear Market Is Coming, I'm Buying This 1 ETF Hand Over Fist
Key Points
The Schwab U.S. Dividend Equity ETF could provide some shelter from a bear market storm.
The fund is heavily allocated to defensive sectors.
A dependable dividend could help if markets turn south.
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Seven months into 2026, the S&P 500 is up more than 9% and down only about 1.6% from all-time highs, confirming that bear market conditions (a decline of at least 20% from recent highs) are a long way off. That's good news.
On the other hand, it's worth remembering that while it's often said "complacency is the enemy of progress," in investing, complacency is the enemy of preparedness. Put another way, the bull vs. bear market debate doesn't need to be settled, but investors should be proactive about being equipped for either scenario.
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In the spirit of preparation, let's assume that a bear market is coming. Some exchange-traded funds (ETFs) help investors strike a balance between remaining engaged with equities during pullbacks and providing shelter from market storms. A strong example is the Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD), the second-largest dividend ETF (based on total assets) in the world.
Image source: Getty Images.
Why I'd rush to buy SCHD in a bear market
First, a disclaimer. SCHD isn't an inverse ETF, so it won't rise when markets falter. A reasonable expectation is that it would perform less poorly than S&P 500 ETFs or comparable funds during a bear market.
There is some evidence that could be the case. Dating back to 2018, a period that included a deep market pullback due to trade tensions with China, the coronavirus bear market, and the Federal Reserve's 2022 interest rate-tightening campaign, the Schwab dividend ETF displayed lower annualized volatility than the S&P 500 and a slightly better maximum drawdown.
Two more reasons I'd be excited to embrace this ETF if the bears growl. First, bear markets tend to be short. On average, they last almost 10 months. However, no one knows exactly when they'll end. That gets into the second point: Time in the market beats timing the market. Sure, it'd be great to know exactly when to go to cash before a bear market and know exactly when to start buying stocks again, but those are wishes Mr. Market will never grant.
The Schwab ETF makes it easier to ride out turbulent periods because its lineup comprises financially sound companies with documented commitments to dividend growth. Undoubtedly, bear markets are trying, but investors who don't need income today may find value in allowing the dividends delivered by the SCHD ETF to compound during pullbacks.
Don't forget defense
Another reason I'd be enthusiastic to own this Schwab ETF during a bear market is its defensive posture. It allocates 41.1% of its roster to healthcare and consumer staples stocks. Those sectors are desirable for both dividends and favorable volatility characteristics.
Not only that, but if the next bear market is caused by a macroeconomic calamity or a full-on recession, history confirms that defensive sectors perform less poorly during recessions and in the early stages of economic recovery.
Plus, regardless of market environment, the $103.7 billion Schwab U.S. Dividend Equity ETF is inexpensive to own. Its annual expense ratio is just 0.06%, or $6 on a $10,000 investment, making it one of the most cost-effective funds in the category.
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Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
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