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Low-Beta ETFs to Consider Amid Tech-Led Market Sell-off

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After logging in the best August in more than a decade, the stock market is trapped in the web of sluggish trading. This is especially true as the three major U.S. indices tumbled terribly over the past three trading sessions, slumping to a four-week low. Notably, the Nasdaq Composite Index entered into a correction territory in just three days, representing its quickest plunge ever from a record close.

Spiral of Woes

Most of the decline is attributable to a sharp selloff in technology stocks as investors worried about their lofty valuations after an astounding surge over the past few months. Per the Bloomberg report, valuation has emerged as a concern for the bulls. At about 26 times annual profits for the S&P 500 and 37 times for the Nasdaq 100, American shares are still trading at the highest multiples in more than a decade despite last week’s selloff.

A deadlock in another financial-aid package, budget negotiations and election uncertainty added to the chaos. Further, geopolitics continued to be an overhang on the stocks. In the latest development, President Donald Trump is seeking to curb the U.S. relationship with China, threatening to punish any American companies that create jobs overseas and forbid those that do business in China from winning federal contracts. The Trump administration is also considering another ban on China’s cotton (read: 5 ETFs to Invest Amid Market Rout).

Moreover, the volatility is expected to continue this year given the tightening presidential race. Per the latest data from RealClearPolitics, Democratic nominee Joe Biden's lead over President Donald Trump has significantly narrowed.

Historical Underperformance

September is historically a weak month for the stock market. Per the LPL Financial data, the S&P 500 has fallen about 1% on average in September since 1950. It also revealed that the index has shed 0.2% on average in the election year. This election year could be worse given that the COVID-19 pandemic continues to rage globally. Since World War II, the S&P 500 has seen an average decline of 0.5%, according to CFRA.

The declines are due to a seasonal phenomenon as investors are more prone to selling than buying when they return from their summer vacations, trading volume after Labor Day is mostly bearish, many mutual funds have fiscal years ending Sep 30, window-dressing is rampant, and investors generally sell stocks to pay tuition bills for their kids’ private schools and colleges (read: Top-Ranked Sector ETFs & Stocks to Buy for September).

Bulls Still Have Room to Run

The euphoria surrounding COVID-19 vaccine and continued support from the Fed would offer upside to the stocks. In the latest news conference, President Donald Trump said he believed a COVID-19 vaccine could be approved as soon as October. Further, encouraging data indicating that the American economy is gradually returning to the pre-pandemic level and that COVID-19 cases are moderating will add to the strength. The latest jobs data, which showed that the economy added 1.4 million jobs in August and unemployment rate dropped to 8.4% from 10.2%, is a clear sign of an improving economy.

Given that bears overtook bulls in the recent trading sessions, investors seeking to remain invested in the equity world could consider low-beta ETFs.

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 crumbles. Given lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus lag their peers.

With the help of etfdb.com, we have highlighted five low-beta ETFs from different categories that could be intriguing options for investors amid the current market turbulence. All the funds offer exposure to a number of sectors and have AUM of more than $50 million, indicating their good tradability.

Invesco S&P 500 Downside Hedged ETF (PHDG - Free Report) – Beta: 0.37

This actively managed fund seeks to deliver positive returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns. It tries to follow the S&P 500 Dynamic VEQTOR Index, which provides broad equity market exposure with an implied volatility hedge by dynamically allocating between different asset classes: equity, volatility and cash. The S&P 500 Total Return Index represents the equity component while the S&P 500 VIX Short-Term Futures Index represents the volatility component of the index. The non-equity (volatility + cash) portion makes up for one-fourth of the portfolio while the rest goes to equity. The fund has accumulated $142.4 million in its asset base and charges 39 bps in fees per year from investors. Volume is light, exchanging 81,000 shares a day on average.

JPMorgan Equity Premium Income ETF (JEPI - Free Report) – Beta: 0.46

This ETF seeks to provide current income while maintaining prospects for capital appreciation. It generates income through a combination of selling options and investing in U.S. large cap stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends. It has been able to manage assets worth $85 million since its debut in late May and charges 35 bps in annual fees. The product trades in average daily volume of 37,000 shares (read: 5 Cheap Dividend ETFs for Safe and Consistent Income).

WBI Bull|Bear Quality 3000 ETF (WBIL - Free Report) - Beta: 0.48

This fund is actively managed and seeks long-term capital appreciation. It invests in in small-, mid- and large-cap securities with strong measures of financial health and potential for growth. WBIL has amassed $52.6 million and charges 1.21% in annual fees. Volume is good as it exchanges 4,000 shares in hand per day on average.

Global X Nasdaq 100 Covered Call ETF (QYLD - Free Report) - Beta: 0.68

This ETF follows a “covered call” or “buy-write” strategy, in which the fund buys the stocks in the Nasdaq 100 Index and “writes” or “sells” corresponding call options on the same index. It tracks the CBOE Nasdaq-100 BuyWrite V2 Index. The product has $1.3 billion in AUM and an expense ratio of 0.60%. It trades in average daily volume of 595,000 shares.

Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) – Beta: 0.71

This ETF provides exposure to stocks with the lowest-realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index. SPLV has amassed $8.9 billion in its asset base and trades in heavy volume of around 2.5 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Prepare for Volatility & Inflation with These ETFs).

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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