Market Meltdown Coming? These 2 ETFs Are Ready to Surge If Stocks Tank

<!– Legacy Bulma: `live-update-content` opening

The U.S. stock market has delivered impressive gains for over a decade, but warning signs of a potential downturn are mounting. Inflation remains sticky, interest rates hover at levels that could squeeze corporate profits, and geopolitical tensions from ongoing trade disputes to conflicts abroad add layers of uncertainty. Analysts point to overvalued tech stocks and slowing consumer spending as red flags for the S&P 500. 

In a crash scenario, where domestic indices plummet 20% or more, diversification becomes essential. Investors often overlook opportunities outside U.S. borders, where economic cycles may decouple from American woes. Regions with lower valuations and faster growth potential could offer a buffer, allowing portfolios to weather the storm while positioning for recovery. 

This approach doesn’t guarantee profits but provides a pragmatic hedge against prolonged U.S.-centric declines. 

Vanguard FTSE Developed Markets ETF (VEA)

For investors seeking stability beyond the U.S., the Vanguard FTSE Developed Markets ETF (NYSEARCA:VEA) stands out as a low-cost gateway to mature economies. Launched in 2007, VEA tracks the FTSE Developed All Cap ex US Index, holding over 4,000 stocks from countries like Japan, the U.K., Canada, and Switzerland. It excludes emerging markets and the U.S., focusing instead on established firms with proven track records. 

Top holdings include ASML Holding (NASDAQ:ASML), SAP (NYSE: SAP), and Novo Nordisk (NYSE:NVO), but with hundreds of companies in its portfolio, no one stock accounts for more than 1.5% of the fund. Yet these companies span technology, healthcare, and industrials, providing broad sector balance.

What makes VEA compelling in a potential S&P 500 crash? Its geographic spread reduces correlation to U.S. events. During the 2022 market dip, when the S&P 500 fell 19%, VEA declined only 14%, thanks to resilience in European and Asian developed markets.

Fast-forward to recent performance: Over the past year through October 22, 2025, VEA delivered a total return of 22%, surpassing the Vanguard S&P 500 ETF‘s (NYSEARCA:VOO) 15.5%. This edge came from strong rebounds in Japanese equities, driven by export growth, and steady European gains amid easing energy pressures.

Looking at three year returns, VEA does slip behind VOO with cumulative returns of 77% to 87%, respectively, but VOO — like the S&P 500 itself — has become dominated by the tech giants, which account for the lion’s share of the index’s performance. That alone makes the S&P more risky.

With an expense ratio of only 0.03%, it keeps more returns in investors’ pockets. In a crash, VEA’s slightly lower volatility — its standard deviation is around 12% versus VOO’s 13% — could limit drawdowns. 

Analysts at Morningstar rate VEA highly for its diversification benefits, noting it adds value without excessive risk. For those holding VOO, allocating about a quarter of your portfolio to VEA could smooth returns over cycles. Recent inflows hit $10.5 billion in 2025, signaling institutional confidence. As U.S. stock valuations stretch, VEA offers a value tilt that might shine if recession fears materialize.

Vanguard FTSE Emerging Markets ETF (VWO)

Shifting to higher-reward plays, the Vanguard FTSE Emerging Markets ETF (NYSEARCA:VWO) targets economies in rapid transition, like China, India, and Taiwan. Introduced in 2005, VWO mirrors the FTSE Emerging Markets All Cap China A Inclusion Index, with roughly 5,500 holdings emphasizing large- and mid-cap stocks. 

It captures about 90% of the emerging market investable universe, with heavy weights in financials, tech, and consumer goods. Leading positions feature Taiwan Semiconductor Manufacturing (NYSE:TSM), Tencent Holdings, and Alibaba (NYSE:BABA), accounting for over 20% of assets. This setup bets on demographic booms and urbanization trends that U.S. markets have largely exhausted.

In crash scenarios, VWO’s appeal lies in its countercyclical dynamics. Emerging markets often lag in U.S.-led booms but recover vigorously when dollar strength wanes or commodity prices rise. Historical data shows that after 2008, VWO had cumulative total returns of 71% in the following three years while the S&P 500 managed 88%. More recently, over the past year, VWO posted a total return of 18.2%, topping VOO’s 15.54%. It’s up 24% year-to-date. Gains were fueled by India’s robust GDP growth at 7% annually and China’s stimulus measures boosting tech and property sectors.

On a three-year basis, VWO’s annualized return of 7.8% trails VOO’s 8.2% slightly but remains competitive, especially given emerging markets’ 12% volatility matches VOO’s while offering higher yields — VWO’s dividend is 2.7% versus VOO’s 1.1%. 

At 0.07% expense ratio, costs are negligible. Key drivers include Reliance Industries, an Indian conglomerate in energy and telecom, which has surged 25% in 2025 on domestic consumption. If an S&P crash stems from Fed tightening, a weaker dollar could propel VWO, as seen in 2020 when it outperformed by 10 points during the pandemic recovery.

Critics highlight currency risks and political volatility, but VWO’s broad diversification mitigates single-country blows — China is capped at 30%. BlackRock strategists recommend it for 10% to 15% portfolio slices in downturn hedges. 

With $138 billion in assets, VWO has drawn $5 billion in net flows this year, underscoring its role as a growth engine. As U.S. tech stalls, VWO’s P/E of 11 presents bargains in undervalued regions poised for catch-up. 

The image featured for this article is © Nuthawut Somsuk / iStock via Getty Images