If a Bear Market Is Coming, History Says These Are the Only ETFs You Need

Understandably, hearing the words "bear market" doesn't typically put a bright smile on an investor's face, but it's an inevitable part of the stock market cycle. The sooner you accept it, the sooner you can start prepping accordingly and appreciate some of the silver linings (such as buying great stocks at a "discount").

There's no way to say with 100% certainty when the next bear market will happen, but with the S&P 500 having doubled since the start of 2023 -- something that has only happened a handful of times in such a short period -- investors are rightfully wondering if a bear market is on the horizon.

With a "when, not if" approach, it's never too early to start prepping your portfolio accordingly. When a bear market eventually happens, you'll be in good shape if you have the Vanguard S&P 500 ETF (NYSEMKT: VOO) and Schwab U.S. Dividend Equity ETF (NYSEMKT: SCHD) in your portfolio.

Image source: Getty Images.

Ride along with the U.S. economy

The S&P 500 is one of the main indexes used to declare a bear market, which happens when it drops by 20% or more from a recent high. The last time it happened was in 2022.

It might seem counterproductive to hold an S&P 500 ETF like the Vanguard S&P 500 ETF during a bear market, but the S&P 500 has historically been one of the most resilient investments around. It has survived and thrived through every bear market it has experienced.

VOO has only been around since September 2010, but since the start of 2006, the S&P 500 is up 515%, averaging 9.2% annual returns. And that's while also experiencing historic economic events like the financial crisis and COVID-19.

When you invest in VOO, you're essentially investing in the broader U.S. economy. It's made up of only 500 companies, but because of their size, they have a larger influence on the U.S. economy, and the economy and the S&P 500 tend to move in the same direction over time.

VOO is diversified, holding companies across sectors, but it's top-heavy, and large tech stocks heavily influence its performance. Its top eight holdings are all tech stocks:

• Nvidia: 7.55%
• Apple: 7.04%
• Alphabet (both classes): 5.86%
• Microsoft: 5.36%
• Amazon: 4.13%
• Broadcom: 2.86%
• Meta: 1.90%

Accounting for 34.7% of VOO, these companies will likely be a large part of why a bear market happens and a large part of why you can feel comfortable about the market's rebound. Past performance doesn't guarantee future results, but there's no reason to believe these companies (along with the other S&P 500 titans) won't continue to deliver good long-term returns.

You can't go wrong with a guaranteed income

The Schwab U.S. Dividend Equity ETF is one of the staple dividend ETFs on the market, and for good reason. It holds high-quality companies that have shown a commitment to above-average dividends and consistent dividend increases over the years.

During a bear market, it helps to have a guaranteed income regardless of how a stock or ETF performs. SCHD offers a dividend yield of around 3%, just below its average over the past decade. It's one of the higher-yielding dividend ETFs, offering an attractive payout without the risks of investing in individual companies (especially in a bear market).

Unlike tech-heavy VOO (36.6%), SCHD's companies come from more defensive sectors, including healthcare (20.7%), consumer staples (20.4%), and energy (14.1%). They aren't immune to bear markets, but many provide essentials and maintain consistent demand.

Even with its dividend focus, SCHD has averaged 13.6% total returns since it began trading in October 2011. Only time will tell if that's sustainable, but one thing is for sure: SCHD's dividend will remain attractive and as stable as it gets. That's a good hold during a bear market.

Stefon Walters has positions in Apple, Microsoft, and Vanguard S&P 500 ETF. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Broadcom, Meta Platforms, Microsoft, Nvidia, and Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.