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Defensive ETF Strategies for Q4 Amid Election Uncertainty

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Concerns looming around the pandemic have largely dominated market headlines in 2020. The positive coronavirus test results of President Donald Trump and first lady Melania Trump escalated tensions. The continuous spike in new coronavirus cases in several parts of the United States is also worrying market participants. 

Going on, this election year could be worse keeping in mind the aggravating coronavirus pandemic. Meanwhile, following the first of the three presidential debates in Cleveland, things seem to be in favor of Mr. Joe Biden.  According to data from Smarkets, Biden’s chances of winning are now pegged at 62%, while odds in favor of Trump are at 38%, per a Yahoo Finance article. Going on, data from U.K.-based Oddschecker reflects that Biden’s chances of winning have risen to more than 58% while Trump’s have declined to around 42%, according to the same Yahoo Finance article.

Historically, stock markets have been found to exhibit volatility in the month before the election. Also, investors generally opt for cash or cash-like investments instead of risky assets like equities while evaluating the economic and financial impact of the election results.

Moreover, there is uncertainty regarding the introduction of a coronavirus vaccine. Going by sources, Trump’s administration is believed to be building pressure on getting a vaccine approved before the elections in November. Meanwhile, the FDA has expressed intentions of not compromising with the vaccine’s quality, safety and efficacy standards when it comes to its decision of approval.

In such a scenario, investors are desperately waiting for the introduction of additional U.S. fiscal stimulus package, which shall be an absolute necessity for economic recovery. In fact, several sets of economic data for August and September are indicating a slowdown in U.S. economic recovery in the absence of introduction of a fresh round of fiscal stimulus.

Defensive ETF Strategies to Consider

Let’s look at some safer ETF strategies that investors can play keeping in mind certain burning issues that can cause increased uncertainty in the fourth quarter of 2020:

Dividend ETFs to Bet On

The appeal of dividend ETFs has been rising in the face of easing monetary policy on the global front, and market uncertainty triggered by the pandemic and deceleration in global growth. This is because dividend-paying securities are major sources of consistent income for investors when returns from equity markets are uncertain. Against this backdrop, dividend ETFs like Vanguard Dividend Appreciation ETF (VIG - Free Report) , ProShares S&P 500 Dividend Aristocrats ETF (NOBL - Free Report) , iShares Core Dividend Growth ETF (DGRO) and First Trust Rising Dividend Achievers ETF (RDVY) might be compelling picks (read: A Quick Guide to Dividend Aristocrat ETFs).

Play the Low-Volatility ETFs

Demand for funds with “low volatility” or “minimum volatility” generally increases during tumultuous times. These seemingly-safe products usually do not surge in bull market conditions but offer more protection than the unpredictable ones. Providing more stable cash flow than the overall market, these funds are less cyclical in nature. Here are some options --  iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) , Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) , iShares Edge MSCI EAFE Minimum Volatility ETF (EFAV), iShares Edge MSCI Min Vol Global ETF (ACWV), Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) (read: 10 Power-Packed ETFs to Buy for Second-Half 2020).

Add Strength With Quality ETFs

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and high margins. They also have a track record of stable or rising sales and earnings growth. In comparison to plain vanilla funds, these products help in lowering volatility and perform rather well during market uncertainty. Further, academic research has proven that high-quality companies constantly provide better risk-adjusted returns than the broader market over the long term.

Given this, we have highlighted some ETFs like iShares MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) andFlexShares Quality Dividend Index Fund (QDF) targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment (read: Bypass the Market Rout With These Quality ETFs).

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