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Tech Sell-Off, New Tariff Threat Put Low Beta ETFs in Focus
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After peaking last week, the U.S. stock market was again caught in a web of uncertainty and volatility at the start of September. This is especially true in the backdrop of a steep sell-off in the tech sector and Trump’s new tariff threat.
Trump is looking to implement another tariff on $200 billion worth of Chinese goods as soon as the public-comment period concludes on Sep 7 midnight. China has warned of retaliation if the United States slaps new tariffs that will lead to escalation in trade war. The ongoing troubles in emerging markets, chances of auto tariffs on other countries, Iran oil sanctions, another budget deadline and the mid-term election in November add to the woes.
Further, September is historically the worst month of the year for the stock market and even worse in the mid-term election years (read: Scared of a September Lull? Play 6 ETFs).
Amid the uncertainties, the dual tailwinds of strong corporate earnings and a booming economy will continue to keep the positive momentum in the stock market alive albeit at a slower pace. As a result, investors may want to remain invested in the equity world but at the same time seek protection from a downside. This could be easily achieved by investing in low-beta products.
Why Low Beta?
Beta measures the price volatility of stocks relative to the overall market. It has direct relationship to market movements. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market.
That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market is crumbling. Given lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when the markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus lag their peers (read: Here's Why Low Volatility ETFs Will Outperform in September).
With the help of our ETF Screener, we have highlighted five ETFs that could be intriguing options for investors amid bouts of volatility. All the funds offer exposure to a number of sectors and have AUM of more than $50 million, indicating their good tradability.
Pacer Trendpilot US Mid Cap ETF (PTMC - Free Report) – Beta: 0.48
This ETF follows the Pacer Trendpilot US Mid Cap Index, which uses an objective, rules-based methodology to implement a systematic trend-following strategy that directs 100% exposure to the S&P MidCap 400 Index, or 50% to the S&P 500 and 50% to 3-Month US Treasury bills, or 100% to 3-Month US Treasury bills, depending on the relative performance of the S&P MidCap 400 Total Return Index & its 200-day simple moving average. The fund has AUM of $640.8 million and charges 60 bps in annual fees. Average trading volume is moderate at 65,000 shares.
Global X SuperDividend U.S. ETF (DIV - Free Report) – Beta: 0.54
This fund provides exposure to 50 of the highest dividend yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It is widely diversified across each component as none of these hold more than 2.74% of the assets. Utilities accounts for one-fourth of the portfolio, closely followed by real estate (23%), energy (14%), consumer discretionary (13%), and consumer staples (13%). The product has amassed $420.8 million in its asset base while trading in moderate volume of about 68,000 shares. It charges 45 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 ETFs Yielding 5% or More).
This ETF follows the CBOE NASDAQ-100 BuyWrite V2 Index, which is designed to buy a NASDAQ-100 stock index portfolio, and writing (or selling) the near-term NASDAQ-100 Index covered call option, generally on the third Friday of each month. The product has $354.1 million in AUM and trades in a good volume of more than 121,000 shares a day on average. Expense ratio came in at 0.60%.
This fund provides exposure to U.S. companies with a relatively high yield, low price and earnings volatility by tracking the QS Low Volatility High Dividend Index. Holding 79 stocks in its basket, LVHD is widely spread out across each component with none making up for more than 2.7% of assets. Utilities dominate the fund’s portfolio with one-fourth share while consumer staples, real estate and consumer discretionary round off the next three spots. The ETF has $603.6 million in AUM and trades in moderate volume of 52,000 shares. It charges 27 bps in fees and has a Zacks ETF Rank #3.
This is the only ETF that focuses exclusively on companies listed on the Russell 2000 Index that have raised dividends for at least 10 consecutive years. It holds 61 stocks in its basket with each accounting for less than 1.8% share. Here also, utilities takes the largest share at 23.7% followed by industrials (14%), financials (12.7%), and consumer staples (11.3%). The fund has amassed $458.6 million and charges 40 bps in annual fees. It trades in lower average daily volume of 31,000 shares and carries a Zacks ETF Rank #3 with a Medium risk outlook (read: Does the Small-Cap Rally Have Legs? 3 Quality ETF Picks).
Bottom Line
Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability to the portfolio, protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in the current market environment and seeking outperformance.
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Tech Sell-Off, New Tariff Threat Put Low Beta ETFs in Focus
After peaking last week, the U.S. stock market was again caught in a web of uncertainty and volatility at the start of September. This is especially true in the backdrop of a steep sell-off in the tech sector and Trump’s new tariff threat.
Trump is looking to implement another tariff on $200 billion worth of Chinese goods as soon as the public-comment period concludes on Sep 7 midnight. China has warned of retaliation if the United States slaps new tariffs that will lead to escalation in trade war. The ongoing troubles in emerging markets, chances of auto tariffs on other countries, Iran oil sanctions, another budget deadline and the mid-term election in November add to the woes.
Further, September is historically the worst month of the year for the stock market and even worse in the mid-term election years (read: Scared of a September Lull? Play 6 ETFs).
Amid the uncertainties, the dual tailwinds of strong corporate earnings and a booming economy will continue to keep the positive momentum in the stock market alive albeit at a slower pace. As a result, investors may want to remain invested in the equity world but at the same time seek protection from a downside. This could be easily achieved by investing in low-beta products.
Why Low Beta?
Beta measures the price volatility of stocks relative to the overall market. It has direct relationship to market movements. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market.
That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market is crumbling. Given lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when the markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus lag their peers (read: Here's Why Low Volatility ETFs Will Outperform in September).
With the help of our ETF Screener, we have highlighted five ETFs that could be intriguing options for investors amid bouts of volatility. All the funds offer exposure to a number of sectors and have AUM of more than $50 million, indicating their good tradability.
Pacer Trendpilot US Mid Cap ETF (PTMC - Free Report) – Beta: 0.48
This ETF follows the Pacer Trendpilot US Mid Cap Index, which uses an objective, rules-based methodology to implement a systematic trend-following strategy that directs 100% exposure to the S&P MidCap 400 Index, or 50% to the S&P 500 and 50% to 3-Month US Treasury bills, or 100% to 3-Month US Treasury bills, depending on the relative performance of the S&P MidCap 400 Total Return Index & its 200-day simple moving average. The fund has AUM of $640.8 million and charges 60 bps in annual fees. Average trading volume is moderate at 65,000 shares.
Global X SuperDividend U.S. ETF (DIV - Free Report) – Beta: 0.54
This fund provides exposure to 50 of the highest dividend yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It is widely diversified across each component as none of these hold more than 2.74% of the assets. Utilities accounts for one-fourth of the portfolio, closely followed by real estate (23%), energy (14%), consumer discretionary (13%), and consumer staples (13%). The product has amassed $420.8 million in its asset base while trading in moderate volume of about 68,000 shares. It charges 45 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 ETFs Yielding 5% or More).
Horizons Nasdaq 100 Covered Call ETF (QYLD - Free Report) - Beta: 0.58
This ETF follows the CBOE NASDAQ-100 BuyWrite V2 Index, which is designed to buy a NASDAQ-100 stock index portfolio, and writing (or selling) the near-term NASDAQ-100 Index covered call option, generally on the third Friday of each month. The product has $354.1 million in AUM and trades in a good volume of more than 121,000 shares a day on average. Expense ratio came in at 0.60%.
Legg Mason Low Volatility High Dividend ETF (LVHD - Free Report) – Beta: 0.60
This fund provides exposure to U.S. companies with a relatively high yield, low price and earnings volatility by tracking the QS Low Volatility High Dividend Index. Holding 79 stocks in its basket, LVHD is widely spread out across each component with none making up for more than 2.7% of assets. Utilities dominate the fund’s portfolio with one-fourth share while consumer staples, real estate and consumer discretionary round off the next three spots. The ETF has $603.6 million in AUM and trades in moderate volume of 52,000 shares. It charges 27 bps in fees and has a Zacks ETF Rank #3.
ProShares Russell 2000 Dividend Growers ETF (SMDV - Free Report) – Beta: 0.64
This is the only ETF that focuses exclusively on companies listed on the Russell 2000 Index that have raised dividends for at least 10 consecutive years. It holds 61 stocks in its basket with each accounting for less than 1.8% share. Here also, utilities takes the largest share at 23.7% followed by industrials (14%), financials (12.7%), and consumer staples (11.3%). The fund has amassed $458.6 million and charges 40 bps in annual fees. It trades in lower average daily volume of 31,000 shares and carries a Zacks ETF Rank #3 with a Medium risk outlook (read: Does the Small-Cap Rally Have Legs? 3 Quality ETF Picks).
Bottom Line
Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability to the portfolio, protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in the current market environment and seeking outperformance.
Want key ETF info delivered straight to your inbox?
Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>