2 ETFs That Have Held Up Best During Every Recent Market Pullback

The article highlights two dividend ETFs that have outperformed in down markets: First Trust Morningstar Dividend Leaders ETF gained about 3% in the 2022 bear market and about 15% YTD through March 30, while WisdomTree U.S. High Dividend ETF returned about 4% in 2022 and roughly 12% YTD through May 27. Both funds are positioned as defensive diversifiers with histories of positive returns during broader market selloffs, supported by high-dividend screens and quality/risk filters.

Analysis

This is less a “dividend quality” trade than a crowded-risk-off expression with a yield-screen wrapper. The key second-order effect is that these ETFs are effectively long the cash-rich, slower-growth balance sheets that benefit when the market starts pricing recession odds higher; that makes them useful as portfolio insurance, but also means they can underperform sharply if rates back up and the market rotates back to cyclicals or duration. The fact that their strongest periods clustered around drawdowns suggests the alpha is coming from factor timing, not structural edge, so the trade only works if the macro regime stays fragile.

Within the basket, CVX looks like the cleanest balance-sheet/capital-return compounder, while VZ is more of a defensive cash-flow asset with limited rerating upside. The tobacco sleeve (MO, PM) is important because it adds low-correlation pricing power and buyback support, but it also concentrates the strategy in regulatory and litigation risk that can gap lower if policy headlines shift. ABBV is the highest-quality healthcare ballast here: if the market wants defensives, ABBV should hold up better than the more levered income names because earnings growth can offset yield compression.

The consensus is likely overpaying for “downside protection” after a strong run in these funds. If the market stabilizes, the relative performance tailwind fades quickly because these portfolios have modest organic growth and limited multiple expansion capacity; they protect capital, but they rarely compound at equity-market rates once fear subsides. The real risk is that investors buy them after the drawdown, then watch them lag in the first 3-6 months of a recovery while still collecting dividend yield.

Key Decisions for Investors

• Use FDL or DHS as a tactical 3-6 month hedge only if macro stress is rising; size as a 10-20% sleeve replacement for lower-quality cyclicals rather than as a core equity holding.
• Prefer CVX and ABBV over VZ inside any dividend-tilted basket: CVX offers stronger capital-return flexibility and ABBV has better earnings resilience; VZ is the weakest upside/downside trade if rates fall or the market rebounds.
• Pair trade: long FDL / short XLY or IWM into a growth scare; this captures the factor rotation if recession odds rise, with the short leg providing beta monetization if defensives hold up as expected.
• If buying DHS, treat MO/PM as a policy-risk basket and consider trimming after a 5-8% relative outperformance versus the market, since the drawdown hedge tends to mean-revert once volatility normalizes.
• Avoid chasing these ETFs after a sharp 1-2 month rally; wait for a pullback or a confirmed risk-off macro catalyst, because the entry point matters more than the yield when the market regime is uncertain.