AI Bubble Burst or Correction? Here’s How to Prepare With Low-Volatility ETFs

With all the AI bubble headlines out there, it’s easy to conclude that the great bull run will end in tears and perhaps irrecoverable losses for those who’ve chased the hottest AI names in the market. Undoubtedly, it’s always a good idea to be prepared for a sudden surge in volatility or even the start of a new bear market.

But with price-to-earnings (P/E) multiples still quite reasonable on a number of top AI growers, I’m inclined to think we’ll be dealt a correction or even a “mild” bear market, rather than a scenario that sees the market shed more than half of its value or more. In any case, corrections should be expected to happen every year or two, with a bear market happening every couple of years. The fear of painful drawdowns could cause some investors to miss out on the stock market, which continues to be one of the best asset classes to own to build and compound wealth.

While only time will tell, I’m more inclined to bet on a correction striking than a bubble burst scenario, the likes of which hasn’t happened since 2000 (for the Nasdaq) or the biotech bubble from around a decade ago. So, if your definition of a bubble is a mere 10-25% retreat in stock valuations, then perhaps one could be in the cards over the medium term.

If you view it as a more severe 2000-esque implosion, however, I just don’t see the setup for such a broad sector-wide decline, at least not yet. Arguably, Nvidia (NASDAQ:NVDA), which is center stage in the AI boom, still looks as cheap as ever. Either way, for those who can’t risk being on the receiving end of a double-digit percentage decline, here are a pair of low-volatility ETFs to consider.

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iShares MSCI USA Min Vol Factor ETF

iShares MSCI USA Min Vol Factor ETF (USMV) is one of the most popular lower-volatility ETFs to hide in if you’re afraid of a correction. The ETF is also home to some great companies that can power decent appreciation over the long run. Of course, you’re not getting the same kind of return as you’d get from the likes of the S&P 500.

However, the 1.5% yield is solid, as is the low 0.64 beta, which could dampen downside come the next market upset. Over the past year, shares have been flat, gaining just over 2% while the S&P has taken off double-digit percentage points. While the low-volatility theme isn’t my favorite, I do like the mix of stocks, the sector-wide diversification, and the cheaper 26.0 times trailing P/E ratio.

While I wouldn’t load up on the USMV if you’re still bullish on the AI trade over the long run, I would consider building a position if you, like many new investors, have too much skin in the tech trade and wouldn’t handle a tech-driven spill all too well.

iShares MSCI EAFE Min Vol Factor ETF

iShares MSCI EAFE Min Vol Factor ETF (EFAV) is another iShares ETF that’s a nice fit for volatility-shy investors who want to ensure they’re prepared for the next volatility surge. With a focus on low-beta names within Europe, Australia, Asia, and the Far East, the internationally-focused ETF is a low beta (0.76) way to get more yield (2.9%) and an even lower P/E ratio (18.17).

Underneath the hood of the ETF, you’re going to see hundreds of stocks, some of which you’ll know and others you may never have heard of. Either way, it’s a one-stop shop for nervous investors who want more value, international (and sector) diversification, yield, and less volatility. And with a 0.20% expense ratio, the fees for investing in the EFAV are quite competitive as far as factor-based international ETFs are concerned. All considered, it’s a solid choice to supplement the USMV to prepare for volatility.

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