Building a Defensive ETF Portfolio: Three Vanguard Solutions to Guard Against a Stock Market Crash

The financial markets have delivered impressive returns over the past few years, but there’s mounting evidence suggesting the rally may be running out of steam. When a stock market crash arrives—and history suggests it eventually will—investors who’ve concentrated their wealth in equities may face devastating losses. The key is identifying defensive strategies now, before market conditions deteriorate.

Two critical warning signals deserve attention. The Shiller CAPE ratio, which adjusts for inflation and cyclical earnings variations, has reached levels historically associated with market peaks. Meanwhile, the Buffett indicator—measuring total stock market capitalization relative to GDP—flashes similar caution. These metrics don’t predict crashes with precision, but they suggest elevated risk in current valuations.

Fortunately, Vanguard offers several exchange-traded funds specifically designed to cushion portfolios against severe downturns. Here’s how three of these defensive options stack up:

Vanguard Short-Term Treasury ETF: Rethinking Bond Safety

Traditional thinking held that long-duration U.S. Treasuries provided bulletproof protection during equity selloffs. That assumption has cracked. Investment analysis from State Street revealed that “longer-dated Treasuries no longer reliably offset equity drawdowns,” a finding reinforced by China’s pullback in Treasury holdings (now at 2008 lows) and Denmark’s announcement to divest its entire position, citing U.S. fiscal deterioration.

Short-term government securities tell a different story. The Vanguard Short-Term Treasury ETF (NASDAQ: VGSH) holds 92 individual Treasury bonds with an average duration of just 1.9 years. This shorter window minimizes interest-rate sensitivity while maintaining stability during volatility spikes.

The fund charges only 0.03% annually—among the lowest in the industry. Its 30-day SEC yield hovers near 3.6%, providing modest income without exposure to duration risk. While this ETF won’t generate outsized gains if equities crater, it’s unlikely to decline alongside a stock market crash, making it an effective portfolio anchor.

Vanguard Total Bond Market ETF: Diversified Fixed-Income Defense

Beyond government bonds, investment-grade corporate debt has historically moved inversely to stock prices—meaning bond values often rise when equities fall. The Vanguard Total Bond Market ETF (NASDAQ: BND) packages this dynamic into a single holding.

This diversified bond fund encompasses an astonishing 11,444 fixed-income securities, with an average duration of 5.7 years. About 69% comes from U.S. government issuance, while the remainder flows into corporate bonds rated BBB or higher—quality securities with manageable credit risk.

Compared to short-term Treasuries alone, this approach carries somewhat elevated risk. The compensation appears meaningful: a 30-day SEC yield of approximately 4.2%. For investors balancing the dual objectives of steady income and downside cushioning, this fund delivers on both fronts. Its broader exposure also helps investors resist the temptation to abandon their risk-mitigation strategy during market turbulence.

Vanguard U.S. Minimum Volatility ETF: Equity Exposure with Reduced Turbulence

While bonds form the traditional portfolio insurance, some investors prefer maintaining meaningful equity participation rather than abandoning stocks entirely. The Vanguard U.S. Minimum Volatility ETF (NYSEMKT: VFMV) bridges this gap through quantitative screening that selects only the lowest-volatility stocks available.

The fund maintains holdings in 186 stocks spanning 10 sectors, with top positions including Lam Research, Johnson & Johnson, Keysight Technologies, and The Coca-Cola Company. Notably, no single holding exceeds 1.6% of the portfolio, ensuring genuine diversification rather than concentration risk.

An expense ratio of 0.13% remains reasonable compared to broader market funds. The fund’s beta of 0.56 suggests it should decline roughly half as much as the S&P 500 during a severe correction—not crash-proof, but substantially more resilient than the overall market.

Making the Decision: When and How to Implement

Building genuine downside protection requires viewing these funds not as speculative opportunities but as insurance policies. In bull markets, they’ll likely underperform equities—that’s the tradeoff for their protective properties. The real value emerges during the inevitable periods when a stock market crash reshuffles market leadership and tests investor discipline.

Investors concerned about current valuations might consider gradually building positions in one or more of these Vanguard offerings, allowing dollar-cost averaging to reduce timing risk. The combination of short-term Treasuries and broad bond exposure addresses different risk horizons, while the minimum volatility equity fund provides those who can’t abandon stocks entirely with a more resilient alternative.

History demonstrates that downturns come for every bull market eventually. The question isn’t whether to prepare for a stock market crash, but how best to position portfolios when it arrives.