Navigating market volatility: An introduction to defensive assets
What’s happening in the market?
Markets have become increasingly volatile, driven by a mix of global trade tensions, shifting monetary policies, persistent inflation, and uncertainty surrounding U.S. foreign and economic policy under President Trump. Both U.S. and Australian equities have experienced sharp sell-offs, with investor sentiment shaken by economic uncertainty and geopolitical instability.
In Australia, elevated inflation and delayed expectations for the Reserve Bank of Australia (RBA) to cut interest rates are pressuring households and businesses. At the same time, fluctuating global trade conditions are impacting exports and currency stability. This mix of global and domestic pressures is creating a challenging environment that demands a cautious investment approach.
How are investors responding?
In response to rising uncertainty, investor sentiment has shifted towards defensive, income-generating assets. Many are choosing to reduce their exposure to shares and are instead turning to options that offer more predictable returns and capital preservation.
Here are some of the defensive assets growing in popularity:
- Cash-based investments – such as high-interest savings accounts or cash ETFs
- Government bonds – typically low-risk and offer reliable, fixed-income returns
- Corporate bonds – carry moderate risk, but may deliver better yields than government bonds
- Gold – often used as a hedge during market downturns and inflation
This pivot away from riskier assets has contributed to increased volatility in both the ASX and U.S. equity markets, with growing signs of a potential market correction.
Why defensive assets matter during market volatility
Defensive assets can play a valuable role in reducing risk and smoothing out returns—especially when markets are under pressure. Here’s how they work:
- Cash-based investments – Products like high-interest cash ETFs offer short-term stability and liquidity. They’re useful for cushioning your portfolio from equity market fluctuations.
- Government bonds – Considered low-risk, they offer steady income and typically perform well interest rates are falling or equities are underperforming.
- Corporate bonds – These provide higher income potential than government bonds, with slightly more risk—striking a balance between return and capital preservation.
- Gold – Gold often rises in value during inflationary periods or times of geopolitical stress. If you’re interested in learning more about how gold fits into a diversified portfolio, click here to read our blog about Gold investment.
These instruments can help reduce portfolio volatility and deliver more predictable returns, allowing investors to remain invested without taking on excessive risk. However, it’s important to note that a heavily defensive strategy may underperform during a market recovery or bull run, potentially missing out on capital growth opportunities. That’s why it’s essential for investors to align their investment approach with their individual financial goals and risk tolerance—especially when adjusting their strategies in response to changing market conditions.
Defensive ETFs available with Raiz
Raiz gives you access to a curated selection of ETFs designed to help you manage risk and generate consistent income. Here are four defensive-focused ETFs you can explore through a Raiz Plus custom portfolio:
- Betashares Australian High Interest Cash ETF (AAA) Offers exposure to Australian cash deposits, delivering capital stability and competitive monthly income—ideal for investors prioritising liquidity.
- iShares Core Composite Bond ETF (IAF) Provides diversified exposure to Australian government and corporate bonds, offering reliable fixed-income returns with low volatility—well-suited to conservative investors.
- Vanguard Australian Corporate Fixed Interest Index ETF (VACF) Targets investment-grade Australian corporate bonds, striking a balance between risk and yield, and offering potentially higher income than government bonds.
- iShares Core Cash ETF (BILL) Focuses on capital preservation and liquidity, investing in short-term money market instruments—an attractive choice for safety-first investors
Some of these ETFs—such as AAA, IAF, and VACF—are already included in various Raiz prebuilt portfolios, like Conservative, Moderately Conservative, and Moderately Aggressive. However, if you’d like to take a more tailored approach or include ETFs not found in the prebuilt portfolios (like BILL), you’ll need to create a customised Raiz Plus portfolio.
Understanding the risks
All investments carry some level of risk — even traditionally defensive assets like cash, bonds, and gold. These assets may respond differently under varying market conditions and may not always preserve value as expected. Inflation, in particular, can erode purchasing power over time. It’s important for investors to understand the characteristics of each investment and consider how they align with their financial goals, time horizon, and risk tolerance.
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