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Pandemic Surges, Stimulus Fades: ETF Strategies to Follow

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Volatility has once again been playing foul in the stock market due to resurgent COVID-19 infections and fading hopes of additional stimulus.  

The COVID-19 cases are surging in Europe leading to lockdown measures in some of the nations. The French government has implemented curfews in Paris and other major cities, and the United Kingdom will impose tighter restrictions on movement in various places across the country, along with London. The situation sparked concerns over a global economic recovery and could lead to the repetition of the nightmare scenario seen earlier this year.

Meanwhile, U.S Treasury Secretary Mnuchin stated that a fiscal deal is unlikely to be approved before the presidential election on Nov 3. Additionally, no sign of a vaccine anytime soon has led to the chaos in the stock market as Johnson and Johnson (JNJ - Free Report) and Eli Lilly (LLY - Free Report) halted their trials for the novel disease vaccine over safety concerns. Further, election uncertainty and rising U.S.-China tensions also made investors jittery (read: Defensive ETF Strategies for Q4 Amid Election Uncertainty).

Against such a backdrop, investors should follow some techniques to minimize volatility in their portfolio. While there are several ways to do this, we have highlighted few of them:

Focus on Low Volatility ETFs

Low-volatility ETFs have the potential to outpace the broader market in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets. Some of the most-popular ETFs in this space include iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) and Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) . The duo has a Zacks Rank #3 (Hold) (read: Factor & Smart Beta ETFs: What You Should Know).

Invest in Quality ETFs

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track record of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Some of the funds in this category, MSCI USA Quality Factor ETF (QUAL - Free Report) , PowerShares S&P 500 High Quality ETF (SPHQ - Free Report) and Barrons 400 ETF (BFOR - Free Report) are worth a look.

Add Value to Your Portfolio

Value ETFs have proven to be outperformers over the long term and are less susceptible to trending markets. This is because value stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. As such, value ETFs have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts. Among these, Vanguard Value ETF (VTV - Free Report) , iShares S&P 500 Value ETF IVE, iShares Edge MSCI USA Value Factor ETF (VLUE - Free Report) and Schwab U.S. Large-Cap Value ETF (SCHV) have a Zacks ETF Rank #2 (Buy) (read: Growth or Value: Which ETFs Have an Edge Ahead of Elections?).

Emphasis on Dividends

Dividend-paying securities are a major source of consistent income for investors to create wealth when returns from the equity market are at risk. This is because these stocks offer the best of both the world — safety in the form of payouts and stability in the form of mature companies, which are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

While there are several dividend ETFs, here are some of the top-ranked, high-yielding products — Vanguard High Dividend Yield ETF (VYM - Free Report) , iShares Core High Dividend ETF (HDV - Free Report) and SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) . VYM has a Zacks ETF Rank #2 while the other two have a Zacks Rank #3 (read: 5 High-Yield Dividend ETFs & Stocks to Buy Now).

Hedge Against Volatility

The volatility-hedged ETFs prove beneficial amid market uncertainty. Investors should note that these funds have the potential to stand out and outperform the simple vanilla funds in case of rising volatility. The most popular of these are DeltaShares S&P 500 Managed Risk ETF DMRL, Innovator S&P 500 Power Buffer ETF POCT and Nationwide Risk-Based U.S. Equity ETF RBUS.

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