2 Defensive ETFs Beating the VTI This Year

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It’s not easy to beat the incredibly popular Vanguard Total Stock Market Index Fund ETF (NYSEARCA:VTI), an ETF that’s even broader than the S&P 500, in any given year. And while those with the ambitious goal of topping the VTI may gravitate towards some of the market’s more aggressive growth plays out there, which includes the likes of the up-and-coming AI and AI energy stocks that power the hyperscalers, I’d argue that there’s also value in stashing away some defensive and internationally-focused ETFs.

Why bother playing things slightly more defensively amid the AI revolution?

Indeed, as you may know by now, the risk-on growth stocks have more room to gain in bull markets, but the pain is also amplified once the next bear market hits. Arguably, even a modest correction could have the potential to be severe for the high-flying names that have already doubled up many times over the past couple of months. Indeed, chasing momentum is a risky game that not every investor knows how to play. In any case, the more defensively-focused stocks and ETFs can come in handy as relative outperformers once the tides inevitably go out.

So, if you’re in the least bit bothered by the AI bubble headlines or the remote possibility of an AI bubble burst, you might be overexposed to the risk-on names and may wish to diversify your portfolio into some of the more defensive names out there that could stand tall once the market moves lower again. For the most part, playing defense can cause one to gain less in bull markets, especially bull runs on the back of revolutionary new technologies (think AI and even quantum computing).

That said, not every defensive stock is destined for relative underperformance relative to the averages, which stand to benefit more from thematic tech booms. In this piece, we’ll look at two more defensively-positioned ETFs that are surprisingly topping the VTI so far this year.

Schwab International Dividend Equity ETF

The Schwab International Dividend Equity ETF (NYSEARCA:SCHY) is a lower-beta ETF (0.87) that’s had its way with the VTI in 2025, gaining more than 23% compared to the 16.5% gain posted by the VTI. Undoubtedly, the first half of the year saw the international names really make up for lost time relative to the U.S. markets.

And while it’ll be a more interesting race going into year’s end, I continue to view the international dividend ETF as a great portfolio diversifier that could fare better if the AI trade takes another breather as we go head-first into Magnificent Seven earnings season, which could go either way.

While I expect tech earnings to be solid, it’ll probably take a bit more than a mild beat to move the needle higher, given how fast valuations have risen. Either way, the SCHY stands out as a great ETF to hang onto if you’re looking to ride out any earnings season-induced bumps in the road. With a nice 3.7% dividend yield, you’ll get paid far more than the VTI as you seek to diversify internationally and across sectors (like consumer staples and industrials) that may be underrepresented in the extremely broad VTI.

First Trust Nasdaq Technology Dividend Index Fund

Indeed, with the AI trade alive and well going into earnings season with high hopes for a U.S.-China trade deal by year’s end (the TikTok deal and delay of China’s export controls on rare earth metals seem to have improved relations), fortune could continue to favor more of a risk-on, growth, and tech investment strategy.

Still, it doesn’t hurt to take on a slightly more defensive tilt with tech, just in case we’re dealt more turbulence going into the new year. At the end of the day, you can still be an AI and big tech bull while embracing defense. And playing things a bit more defensively doesn’t have to be a big drag on portfolio returns, especially when you consider the bull and bear-case scenarios.

First Trust Nasdaq Technology Dividend Index Fund (NASDAQ:TDIV) is such an intriguing ETF, given it’s focused primarily on high-tech dividend payers, many of which are AI innovators that also happen to have rich yields or quickly growing dividends.

At the top of the TDIV, you’re going to find names like International Business Machines (NYSE:IBM), with a 2.2% yield, Texas Instruments (NASDAQ:TXN), with a 3.4% yield, and Qualcomm (NASDAQ:QCOM), with a 2.1% yield. Indeed, the top holdings within the TDIV show that you don’t need a sub-1% yield to profit profoundly from the AI boom. With IBM up 120% in two years, it’s the dividend payers, I think, that could be the best bets for the more defensively-minded investor who doesn’t want to be sidelined from the AI trade.

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