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Defensive ETF Strategies for Those Fearing a Market Meltdown
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Wall Street’s opening performance for this week failed to impress as investors seemed to be worried about stretched stock valuations. All major stocks like Facebook , Amazon (AMZN - Free Report) , Netflix (NFLX), and Google-parent Alphabet (GOOGL - Free Report) , Apple (AAPL - Free Report) and Tesla (TSLA - Free Report) disappointed with their performances, causing a dip in the major broad indices on Jan 11. In fact, Tesla’s 7.8% fall marked its first negative day in 12 and the worst day since Sep 23, 2020 (per a CNBC article).
Going on, DoubleLine Capital founder Jeff Gundlach has cautioned investors regarding the very high valuations of the market relative to historical standards amid the risk of increasing inflation, according to a CNBC article. Nationwide’s Chief of Investment Research, Mark Hackett, has also said that “historically, when momentum and sentiment indicators are this stretched, the market is due for a period of consolidation,” per the same CNBC article.
Some analysts are worried that the market might see a meltdown. In this regard, Edward Yardeni told CNBC’s “Trading Nation” that “the Nasdaq from late 1998 to early 2000 went up over 200%. Now, we’re up almost 100%, and we may very well be on that same track. Everything I’m looking at points to a melt-up,” according to a CNBC article.
Meanwhile, the coronavirus outbreak continues to aggravate globally. The United States is having a tough time controlling the pandemic, with more than 22 million reported COVID-19 cases. Also, the country’s death toll is near 376,000 since the beginning of the pandemic. Highlighting the worsening condition in the United States, a CNN report states that the country has averaged more than 3,000 coronavirus-related deaths per day for the past week, and has seen more than 200,000 new infections for seven consecutive days.
WHO’s chief scientist Dr. Soumya Swaminathan has cautioned that herd immunity will not be attained in 2021 despite the ongoing inoculation process, and social-distancing measures will need to be adhered, per a CNN report.
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 flare up uncertainty in the near term:
Dividend ETFs to Play Now
The appeal of dividend ETFs has been rising in the face of easing monetary policy on the global front, 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.
Although there are plenty of options in the dividend ETF world, ‘dividend aristocrats’ or ‘dividend growers’ are mostly deemed to be the smartest way to deal with market turbulence. Dividend aristocrats are the blue-chip dividend-paying companies with a long history of increasing dividend payments year over year. Moreover, the dividend aristocrat funds provide investors with dividend growth opportunities in comparison to the other products in the space but might not necessarily have the highest yields.
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, iShares Edge MSCI EAFE Minimum Volatility ETF (EFAV - Free Report) , iShares Edge MSCI Min Vol Global ETF (ACWV), Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) (read: ETFs to Counter Georgia Senate Runoffs-Induced Volatility).
Quality ETFs for Solidifying Portfolio
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and high margins. These stocks also have a track record of stable or increasing sales and earnings growth. In comparison to plain vanilla funds, these products help lower 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) and FlexShares 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: An ETF Retirement Portfolio for 2021).
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Defensive ETF Strategies for Those Fearing a Market Meltdown
Wall Street’s opening performance for this week failed to impress as investors seemed to be worried about stretched stock valuations. All major stocks like Facebook , Amazon (AMZN - Free Report) , Netflix (NFLX), and Google-parent Alphabet (GOOGL - Free Report) , Apple (AAPL - Free Report) and Tesla (TSLA - Free Report) disappointed with their performances, causing a dip in the major broad indices on Jan 11. In fact, Tesla’s 7.8% fall marked its first negative day in 12 and the worst day since Sep 23, 2020 (per a CNBC article).
Going on, DoubleLine Capital founder Jeff Gundlach has cautioned investors regarding the very high valuations of the market relative to historical standards amid the risk of increasing inflation, according to a CNBC article. Nationwide’s Chief of Investment Research, Mark Hackett, has also said that “historically, when momentum and sentiment indicators are this stretched, the market is due for a period of consolidation,” per the same CNBC article.
Some analysts are worried that the market might see a meltdown. In this regard, Edward Yardeni told CNBC’s “Trading Nation” that “the Nasdaq from late 1998 to early 2000 went up over 200%. Now, we’re up almost 100%, and we may very well be on that same track. Everything I’m looking at points to a melt-up,” according to a CNBC article.
Meanwhile, the coronavirus outbreak continues to aggravate globally. The United States is having a tough time controlling the pandemic, with more than 22 million reported COVID-19 cases. Also, the country’s death toll is near 376,000 since the beginning of the pandemic. Highlighting the worsening condition in the United States, a CNN report states that the country has averaged more than 3,000 coronavirus-related deaths per day for the past week, and has seen more than 200,000 new infections for seven consecutive days.
WHO’s chief scientist Dr. Soumya Swaminathan has cautioned that herd immunity will not be attained in 2021 despite the ongoing inoculation process, and social-distancing measures will need to be adhered, per a CNN report.
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 flare up uncertainty in the near term:
Dividend ETFs to Play Now
The appeal of dividend ETFs has been rising in the face of easing monetary policy on the global front, 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.
Although there are plenty of options in the dividend ETF world, ‘dividend aristocrats’ or ‘dividend growers’ are mostly deemed to be the smartest way to deal with market turbulence. Dividend aristocrats are the blue-chip dividend-paying companies with a long history of increasing dividend payments year over year. Moreover, the dividend aristocrat funds provide investors with dividend growth opportunities in comparison to the other products in the space but might not necessarily have the highest yields.
Against this backdrop, dividend ETFs like Vanguard Dividend Appreciation ETF (VIG - Free Report) , SPDR S&P Dividend ETF (SDY - Free Report) , iShares Select Dividend ETF (DVY - Free Report) , ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and iShares Core Dividend Growth ETF (DGRO) can be considered (read: A Sneak Peek Into Popular ETF Investing Areas for Q1).
Low-Volatility ETFs to Consider
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, iShares Edge MSCI EAFE Minimum Volatility ETF (EFAV - Free Report) , iShares Edge MSCI Min Vol Global ETF (ACWV), Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) (read: ETFs to Counter Georgia Senate Runoffs-Induced Volatility).
Quality ETFs for Solidifying Portfolio
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and high margins. These stocks also have a track record of stable or increasing sales and earnings growth. In comparison to plain vanilla funds, these products help lower 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) and FlexShares 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: An ETF Retirement Portfolio for 2021).
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 >>