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The shutdown of the U.S. government and the possible raising of the federal government’s debt ceiling are two major concerns for the U.S. economy right now. It seems that a prolonged shutdown is bound to have a major impact on the U.S. economy and consumer confidence.
Following Monday, the U.S. government went in for its first shut down since 1995, on account of Democrats and Republicans’ refusal to compromise over a number of issues. The resultant shutdown will send nearly one million U.S. federal employees home unpaid. Unfortunately, such a shutdown of the federal government will put a wrench into the gears of the recovering U.S. economy (3 Sector ETFs to Watch for the Budget Battle).
However, investors should note that the bigger hazard to the U.S. economy is still the raising of the federal government debt ceiling. President Obama is demanding a rise in debt ceiling of $16.7 trillion in order to avoid a financial crisis. For if there is a breach of the debt ceiling, it could set off a global financial crisis by causing a default on U.S. treasury bonds.
The partial government shutdown has led to uncertainty surrounding the U.S. economy. The U.S. equity market will therefore remain volatile for the month of October. In fact, if the debt ceiling is not raised, it will have a huge impact on the U.S. dollar and stock prices (Time to Buy Treasury Bond ETFs?).
In such a month that looks to be fraught with risk, we would like to highlight some ETFs that represent the most suitable investments in an economic situation like this:
ETFs to Focus on
Low Volatility ETFs
In such a politically uncertain environment, volatility is expected to creep into the market. With the market expected to remain volatile for most of the trading sessions, investors can consider investing in low volatility ETFs (Minimum Volatility ETFs: Fact or Over-estimated Hype?).
In case of any market pullback, investing in ETFs with low risk turns out to be a top choice for investors, in order to endure the market volatility. In this context, PowerShares S&P 500 Low Volatility ETF (SPLV) represents a good option.
SPLV comprises of stocks from the entire universe of S&P 500 stocks that have exhibited lowest historic volatility over the last trailing twelve month period. Low volatility stocks protect the downside risk in the market.
This is the reason why the ETF is tilted towards low beta sectors like consumer staples and utilities. Utilities and consumer staples together account for 55.2% of the asset base.
SPLV appears to be the most popular ETF in the segment trading at volume levels of more than two million shares a day. The fund manages an asset base of $4.4 billion and invests in a basket of 100 securities. The ETF charges a fee of 25 basis points annually.
Johnson & Johnson, Dominion Resources Inc/VA and PepsiCo Inc are the top three holdings of the fund. Over the period of one year, the fund has delivered a return of 16.25%.
When markets become uncertain, investors should consider investing in a defensive sector ETF. Defensive sectors have a role to play when the economy strays from its path of growth. With this being said, utility sector ETFs currently represent an interesting investment strategy.
In this context, the investor can consider investing in Utilities Select Sector SPDR Fund (XLU). XLU is one of the most popular and widely traded utility ETFs. The fund manages an asset base of $5.37 billion.
This fund holds 33 stocks and the top 10 companies get a share of 57.5% net assets. The ETF has a dividend yield of 4.05% and charges a fee of 18 basis points.
Among individual holdings, top stocks in the ETF include Duke Energy, Southern Co, and Dominion Resources comprising 9.27%, 7.72% and 7.62%, respectively, of total net assets (Consider This ETF for a Better Investment in Utilities).
Investors with a pessimistic view on the economy can consider investing in the yellow metal. If the debt ceiling is not raised, it will definitely hurt the U.S. equity market as well as the fixed income credit sectors.
With the debt ceiling debacle, investors are apprehensive about its possible impact on the U.S. economy. In such a scenario, one commodity which is in the limelight is gold. A general trend in the gold market is that it tends to rise when the market turns south.
The two largest gold ETFs in the space are SPDR Gold Trust (GLD) and COMEX Gold Trust (IAU). Both of these are backed by physical gold and match the spot prices of gold. GLD tracks almost 100% the physical price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. Each share represents about 1/10th of an ounce of gold at current prices (Gold Mining ETF Investing 101).
The fund appears to be rich in both asset base and volume. It manages an asset base of $38,622.9 million and trades with a volume level of more than eight million shares a day. It charges a fee of 40 basis points suggesting a lower bid ask spread.
IAU is backed by physical gold under the custody of JP Morgan Chase Bank in London. Each share represents about 1/100th of an ounce of bullion at current prices. This fund manages an asset base of $7,671.3 million a day and trades at a volume level of more than six million shares a day. IAU is a low-cost fund charging a fee of 25 basis points, much lower than what GLD charges at 0.40%.
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