How to Protect your Portfolio Against a Rising VIX

Key Points

• Investors may find safety in these low-beta reliable businesses as the VIX creeps back to its 2024 highs.
• With steady and predictable finances, three stocks could be the place to be until the volatility storm passes. 
• High margins, analyst price target boosts, and an attractive dividend all in one trend back to safety.

Stocks never really stay put. Every once in a small timeframe cycle, they tend to jump and have little ‘hiccups’. These hiccups are characterized by spikes in the volatility index (the VIX), which may bring ample opportunity for traders to make a relatively quick buck but is also the source of many investors’ headaches.

Recently, the VIX broke back up to its 2024 high again, a level not seen since February. This time around, the spike brought on a small rally in 10-year bond yields, spooking equity investors into thinking the Federal Reserve (the Fed) might choose to skip out on its interest rate cut plans for the year.

However, not all hope is lost, as savvy investors will know how to navigate these turbulent times with the right mix of reliable and predictable companies in their portfolios.

Stocks like The Coca-Cola Co. NYSE: KO, Colgate-Palmolive NYSE: CL, and even Equity Residential NYSE: EQR can bring the right mix of low beta behavior (low volatility) along with the financial stability of consumer staples stocks.

It’s All About Coke’s Brand

Thousands of Coca-Cola servings are enjoyed every day around the globe, and virtually no region doesn’t recognize the Coca-Cola logo or can say that its population has never tasted one. This brand penetration, loyalty, and recognition give Coke the sort of business moat that Warren Buffett looks for.

Translated into its financials, Coca-Cola’s gross margins stand reliably above 58%. Such high margins allow Coke to retain its pricing power in front of consumers, guaranteeing investors that the stock could keep beating inflation for the foreseeable future.

In a year when the inflation rate in the U.S. remained between 3-4%, 2023 brought Coca-Cola’s revenue higher by 8%. What matters to investors is how this revenue increased because only 2% came from growth in actual sales volume, and 9% came from price increases.

This stock is among the elite few that can raise prices and still see demand grow, as customers are so accustomed and loyal to the brand regardless of price.

Knowing how important a reliable business like this will be in the coming months, analysts at Citigroup Inc. boosted their price targets on the stock to $68 a share, calling for a 14% upside from today’s prices.

Colgate’s Essentials Investors Can’t Miss

Whether the economy is booming or busting, and whether the VIX is at a five-year high or low, people will still need to brush their teeth in the morning and follow other personal hygiene routines. Because of this fact, Colgate’s low beta of only 0.4 may save portfolios from potential swings.

Like Coca-Cola, Colgate’s financials show a gross margin rate above 58%, showing the potential pricing power this company carries. More than that, analysts at The Goldman Sachs Group boosted their valuations for the stock up to $93 a share, a target of 6% above today’s price.

Reliable and predictable financials allow ample capital management, reflected in the company’s average return on invested capital (ROIC). Over the past 5 years, Colgate has generated an average ROIC of over 25%; not many others can say the same.

On an annual performance, stock prices tend to follow ROIC rates over the long-term, which explains Colgate’s stellar 27% rally in the past 6 months alone.

Equity Residential Will Always Have Rentals

The VIX cushion portfolio wouldn’t be complete without a housing aspect. Equity Residential's portfolio will keep pumping rental income as long as people need a place to live, preferably rent.

Despite the added volatility hitting the markets, hopes of lower interest rates, priced in by May or June 2024 based on the FedWatch tool, are pushing the real estate sector higher.

Over the past quarter, Equity Residential outperformed the Vanguard Real Estate ETF  by more than 5%, which could indicate market preference toward residential real estate over other property types.

This stock won't offer investors much growth potential because it is a real estate investment trust (REIT). What it can offer, however, is a 4.2% dividend yield and a low beta of only 0.85. Because of these characteristics, the REIT is now owned 93% by institutions.

Zooming out a bit, the stock trades at a 32% discount to its 2022 high of $94.3 a share, reached the last time the Fed took on an interest rate cut cycle. History may not repeat itself, but it could rhyme again for this stock.