ETFs For The Fiscal Cliff: Dividends, Consumer Staples And Munis

Includes: MUB, TFI, VDC, VIG
by: Tom Lydon

The fiscal cliff is about one month from materializing, and investors are setting up defense for their portfolios. Should the tax increases and spending cuts come to fruition, the best way to save capital is to have it parked where it will be safe. Certain sector exchange traded funds can help soften the fall if we all go over.

According to a recent article from Morningstar:

"On Jan. 1, a slew of new tax changes and spending cuts is poised to take place. The Bush-era tax cuts will expire, the alternative minimum tax (AMT) will snare more taxpayers, the payroll tax holiday will sunset, and the new investment surtax to pay for the Affordable Care Act will take effect. On the spending side, defense, discretionary spending, and entitlement cuts are on deck, and unemployment insurance will be scaled back."

Investors have various choices other than cash to consider for capital preservation and safety as we head into the last month of 2012. The following sectors are poised to hold up better than others and can help keep losses to a minimum come the first month of 2013, reports Amanda B. Kish for The Motely Fool.

Currently, the tax rate for dividend stocks and ETFs is at 15%, however, once Bush-era tax breaks expire, they could return to 39.6%, ordinary income rates. Some critics argue that even if tax rates went up, dividend paying companies and funds would not fall out of favor due to the low yield climate. Historically, dividend stocks outperform non-paying stocks over periods of time, even during periods of higher taxation. The Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) has a low 0.18% expense ratio that helps keep original principle safe.

The consumer staples sector is traditionally a defensive sector and since everyone will still purchase household staples no matter what happens next, this area of the market can weather just about anything. The Vanguard Consumer Staples ETF (NYSEARCA:VDC) tracks about 100 such companies and holds up well with a 0.19% expense ratio. Plus, the 2.11% yield puts a little back into one's pocket. Keep in mind, this sector is not 100% safe from a slowdown within the economy and will reflect some consumer spending trends, both good and bad.

Muni-bond investors are taking the long view on the sector. One way or another, it's pretty likely that tax rates will go up, especially for those in the higher income brackets. That will make it better to have more investments for assets where the interest income is exempt from federal income taxes, reports Deborah Levine for MarketWatch. Investors should note that bond yields go the opposite direction of prices. SPDR Nuveen Barclays Municipal Bond ETF (NYSEARCA:TFI) and the iShares S&P National AMT-Free Muni Bond Fund (NYSEARCA:MUB) have gained 4.5% this year, more than the two biggest taxable bond ETFs or high-yield ETFs.

Tisha Guerrero contributed to this article.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.