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Growth Worries Spark Appeal for Low-Risk ETFs

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COVID-19, which had sent the stock market into a tailspin in March last year, seems to have resurfaced with the new Delta variant. This is especially true as the highly contagious Delta variant of coronavirus is spreading rapidly in the states with lowest vaccination rates such as Alabama, Arkansas, Louisiana, Nevada, Missouri and Mississippi.

The latest estimates of US Centers for Disease Control and Prevention (CDC) shows that the highly contagious Delta variant now accounts for more than 51% of COVID-19 cases in the United States. The health experts quoted on CNBC that the country, which just celebrated the Fourth of July with some of its first large gatherings in more than a year, is headed toward a “dangerous” fall season when delta is expected to cause another surge in coronavirus cases (read: Celebrate Fourth of July With These ETFs).

The resurgence would lead to another wave of lockdowns and reintroduction of indoor mask mandates, distancing and occupancy limits in certain parts of the country in the coming months. This risk of deceleration in economic growth and has dampened investors’ risk appetite. However, continued vaccine rollouts, expanded stimulus, a healing job market and return of earnings growth bodes well for the stock market rally.

Against such a backdrop,  those looking to remain invested in equity could consider low-risk ETFs.

Why?

Low-risk ETFs have the potential to outpace the broader market in bearish market conditions, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets.

Below, we present five ETFs that could be solid investment options in the current market scenario:

iShares Edge MSCI Min Vol USA ETF (USMV - Free Report)

This fund offers exposure to 183 U.S. stocks having lower volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. It is well spread across a number of securities, with none holding more than 1.7% of the assets. Information technology, healthcare, communication and consumer staples are the top four sectors accounting for a double-digit allocation each. With AUM of $27.8 billion, the product charges 15 bps in annual fees and trades in solid average daily volume of 2.9 million shares. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Low-Volatility ETFs to the Rescue Amid Rising Market Uncertainty).

Invesco S&P 500 Low Volatility ETF (SPLV - Free Report)

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 and holds 103 securities in its basket with none accounting for more than 1.4% of the assets. Consumer staples, utilities, healthcare and industrials make up the top four sectors with a double-digit allocation each. SPLV has amassed $7.9 billion in its asset base and trades in heavy volume of around 2.9 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.

Nationwide Risk-Based U.S. Equity ETF

This ETF follows the Rothschild & Co Risk-Based US Index and employs a risk-based strategy that seeks to provide upside potential while protecting against losses stemming from volatility. It holds well-diversified 252 stocks in its basket, with none of the securities accounting for more than a 1.5% share. Healthcare, consumer defense, technology and industrials are the top four sectors. RBUS has accumulated $125.8 million and charges 30 bps in annual fees. It trades in a moderate volume of 52,000 shares a day on average.

SPDR Russell 1000 Low Volatility Focus ETF (ONEV - Free Report)

This fund follows the Russell 1000 Low Volatility Focused Factor Index and focuses on stocks that exhibit low volatility and offer downside protection. It holds 435 securities in its basket, with none accounting for more than 1.2% of the assets. Industrials, technology and financials are the top three sectors with a double-digit allocation each. The ETF has AUM of $546.7 million and charges 20 bps in annual fees. It trades in average daily volume of about 4,000 shares and has a Zacks ETF Rank #3 (read: 5 Winning ETF Strategies for the Second Half).

Fidelity Low Volatility Factor ETF (FDLO - Free Report)

This fund offers exposure to stocks with lower volatility than the broader market by tracking the Fidelity U.S. Low Volatility Factor Index. Holding 129 stocks in its basket, it is well spread across components, with none holding more than 6% share. From a sector look, the ETF is skewed toward the information technology sector at 27.8% while healthcare, consumer discretionary and communication services round off the next three spots with a double-digit allocation each. The fund has been able to garner $481.6 million in AUM so far and the average daily volume is also moderate at 44,000 shares. FDLO charges 29 bps in annual fees from investors.

Bottom Line

These products could be worthwhile for investors with low-risk tolerance and have the potential to outperform the broader market, especially, if the surge in Delta variant continues to unsettle the stock market.

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