3 Funds to Build a Simple, Defensive Portfolio

Jeremy Glaser: Creating a defensive portfolio doesn't have to be complicated. We asked our ETF analysts to share three funds that could serve as the backbone of a low-cost portfolio that's less sensitive to market volatility.

Alex Bryan: IShares Edge MSCI Minimum Volatility USA ETF is a really strong defensive equity option if you are concerned about the downside risk that U.S. equities may present. This fund takes a holistic approach to reduce volatility, looking not only at individual stock volatility, but also at how stocks in the portfolio interact with each other to affect the overall fund's volatility.

It also takes steps to preserve diversification, limiting its sector tilts relative to the broad market. The types of names it favors are more defensive than most. These are companies like Johnson & Johnson that tend to have relatively stable cash flows. If you look at the fund's performance, it's tended to distinguish itself most during market downturns, and it will likely continue to do so going forward.

Now that being said, the fund does tend to lag during strong market rallies, but if you are looking for a smoother ride than the broad market, this is a really solid option. As expected, it has exhibited lower volatility than the overall market. I think over the long haul, it will continue to offer better risk-adjusted performance than the market itself.

Dan Sotiroff: IShares Edge MSCI Min Vol EAFE ETF is a sensible choice for foreign stock investments. This fund uses a slightly different approach to constructing this portfolio compared with the cap-weighted index. It starts with stocks listed in the EAFE index but then chooses those with lowest volatility over the trailing year. It also accounts for how these stocks interact with each other and attempts to construct the least volatile portfolio from those stocks.

Low volatility strategies such as this one can provide smoother returns and better risk-adjusted returns on a comparable market cap-weighted index. As expected, this fund's volatility has been among the lowest in the foreign large blend Morningstar category.

BlackRock currently charges 20 basis points for this fund, which is considerably low considering the alternative strategy in use here. This should give the fund a long-term durable advantage over many of its actively managed peers.

Phillip Yoo: Vanguard's Short-Term Corporate Bond Index Fund is a good option for building a defensive portfolio thanks to its low tracking error, low fee, the conservative rate, and a credit risk profile. The fund tracks a Bloomberg-Barclay's 1 to 5 Year Corporate Index, which is market-cap-weighted allowing the fund to keep its transaction costs low, as it tilts toward largest issues and bonds.

Because it's cap-weighted, the debt issuance activities in the investment-grade space dictate the fund's portfolio. As a result, the fund is concentrated to the banking sector. However, they are large and well capitalized institutions, with a low default risk, allowing it to offer higher yields than comparable government security bond funds.