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Defensive ETF Strategies to Tackle Wall Street's Dull Start to 2022
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Wall Street has been volatile since the beginning of 2022. The reason for this market slowdown can essentially be the soaring benchmark 10-year Treasury yields, which went up as high as above 1.90% on Jan 19 (hitting the highest level since December 2019). The Federal Reserve has also hinted at taking aggressive measures to manage rising inflation levels. It is expected to begin raising its benchmark interest rate in March. In fact, Goldman Sachs is expecting the Federal Reserve to increase interest rates four times this year, according to a CNBC article.
Certain other factors are clouding the U.S. investment market. Investors are waiting for the fourth-quarter earnings results and the outlook to be presented by corporate America for 2022.
In this regard, Jack Ablin, Cresset Capital founding partner and CIO, has commented that “Investors worry that higher rates and tighter financial conditions will lead to valuation compression, in effect undoing much of the Fed’s decade-long largesse,” per a CNBC article.
High inflation levels continue to be a serious concern for Americans. Once again, the release of the latest inflation data reports demonstrates the metrics’ touching of record-high levels. The December producer price index increased 9.7% year over year, per the recently released reports, hitting the highest level since 2010. Meanwhile, the metric was up 0.2% over the prior month, better than the Dow Jones estimate of 0.4%.
Per the latest Labor Department report, the Consumer Price Index (CPI) in December rose 7% year over year, on par with the Dow Jones estimate, per a CNBC article. The metric came in at the highest level since June 1982. It covers a basket of products, ranging from gasoline and health care to groceries and rents. It also increased 0.5% for the month, surpassing the 0.4% Dow Jones estimate. The soaring food, shelter and used vehicle prices might be primarily responsible for the higher inflation levels.
The release of certain disappointing economic data releases is also raising concerns. For starters, the latest data on U.S. industrial output appears to be disappointing as aggravating COVID-19 cases from the Omicron variant affect the recovering U.S. economy. Per the Fed’s recently released data, total industrial production decreased 0.1% in December. A 0.3% decline in manufacturing output compared unfavorably with a revised rise of 0.6% in November. Going on, there was a 1.5% fall in utility production. Meanwhile, mining production witnessed a 2% gain, mainly due to strength in the oil and gas sector.
U.S. retail sales also slid 1.9% sequentially in December, marking the steepest fall since February 2021 and ending four successive months of strong growth.
Moreover, U.S. consumers are feeling the heat of continuously rising inflation levels. The latest disappointing preliminary consumer sentiment readings for early January that have slipped to the second-lowest level in a decade highlight the same. The University of Michigan’s preliminary consumer sentiment declined to 68.8 in early January from 70.6 last month. The metric lagged the market forecast of a fall to 70.0, per the Reuters survey on economists.
Also, the ISM Manufacturing PMI in the United States slid to 58.7 in December of 2021 from 61.1 in November, lagging market forecasts of 60. The reading highlighted the weakest growth in factory activity since January due to softness in new orders growth (60.4 vs. 61.5). Going on, the latest jobs report for December looks disappointing. The U.S. economy added 199,000 jobs in December 2021, lagging market estimates of 400,000.
ETF Strategies to Follow
Let’s look at some safe ETF strategies that investors can play, keeping in mind certain burning issues that can flare up uncertainty in the near term:
Dividend Aristocrat ETFs to Combat COVID-19 Woes
Dividend aristocrats are blue-chip dividend-paying companies with a long history of increasing dividend payments year over year. Moreover, dividend aristocrat funds provide investors with dividend growth opportunities in comparison to other products in the space but might not necessarily have the highest yields.
‘Dividend aristocrats’ or ‘dividend growers’ are mostly deemed to be the smartest way to deal with market turmoil. Notably, the inclination toward dividend investing has been rising due to easing monetary policy on the global front, and market uncertainty triggered by the pandemic and deceleration in global growth.
These products also form a strong portfolio, with a higher scope of capital appreciation as against simple dividend-paying stocks or those with high yields. As a result, these products deliver a nice combination of annual dividend growth and capital-appreciation opportunity and are mostly good for risk-averse long-term investors.
Low-Volatility ETFs to Manage Market Uncertainties
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 MSCI USA Min Vol Factor ETF (USMV - Free Report) , Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) , iShares MSCI Global Min Vol Factor ETF (ACWV) and Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) (read: ETF Market Outlook & Picks for 2022).
Quality ETFs to Enhance Portfolio Composition
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) , FlexShares Quality Dividend Index Fund (QDF), SPDR MSCI USA StrategicFactors ETF (QUS) and Barron's 400 ETF (BFOR) targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment (read: Quality ETFs Appear Attractive as Fed Rate Hike Nears).
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Defensive ETF Strategies to Tackle Wall Street's Dull Start to 2022
Wall Street has been volatile since the beginning of 2022. The reason for this market slowdown can essentially be the soaring benchmark 10-year Treasury yields, which went up as high as above 1.90% on Jan 19 (hitting the highest level since December 2019). The Federal Reserve has also hinted at taking aggressive measures to manage rising inflation levels. It is expected to begin raising its benchmark interest rate in March. In fact, Goldman Sachs is expecting the Federal Reserve to increase interest rates four times this year, according to a CNBC article.
Certain other factors are clouding the U.S. investment market. Investors are waiting for the fourth-quarter earnings results and the outlook to be presented by corporate America for 2022.
In this regard, Jack Ablin, Cresset Capital founding partner and CIO, has commented that “Investors worry that higher rates and tighter financial conditions will lead to valuation compression, in effect undoing much of the Fed’s decade-long largesse,” per a CNBC article.
High inflation levels continue to be a serious concern for Americans. Once again, the release of the latest inflation data reports demonstrates the metrics’ touching of record-high levels. The December producer price index increased 9.7% year over year, per the recently released reports, hitting the highest level since 2010. Meanwhile, the metric was up 0.2% over the prior month, better than the Dow Jones estimate of 0.4%.
Per the latest Labor Department report, the Consumer Price Index (CPI) in December rose 7% year over year, on par with the Dow Jones estimate, per a CNBC article. The metric came in at the highest level since June 1982. It covers a basket of products, ranging from gasoline and health care to groceries and rents. It also increased 0.5% for the month, surpassing the 0.4% Dow Jones estimate. The soaring food, shelter and used vehicle prices might be primarily responsible for the higher inflation levels.
The release of certain disappointing economic data releases is also raising concerns. For starters, the latest data on U.S. industrial output appears to be disappointing as aggravating COVID-19 cases from the Omicron variant affect the recovering U.S. economy. Per the Fed’s recently released data, total industrial production decreased 0.1% in December. A 0.3% decline in manufacturing output compared unfavorably with a revised rise of 0.6% in November. Going on, there was a 1.5% fall in utility production. Meanwhile, mining production witnessed a 2% gain, mainly due to strength in the oil and gas sector.
U.S. retail sales also slid 1.9% sequentially in December, marking the steepest fall since February 2021 and ending four successive months of strong growth.
Moreover, U.S. consumers are feeling the heat of continuously rising inflation levels. The latest disappointing preliminary consumer sentiment readings for early January that have slipped to the second-lowest level in a decade highlight the same. The University of Michigan’s preliminary consumer sentiment declined to 68.8 in early January from 70.6 last month. The metric lagged the market forecast of a fall to 70.0, per the Reuters survey on economists.
Also, the ISM Manufacturing PMI in the United States slid to 58.7 in December of 2021 from 61.1 in November, lagging market forecasts of 60. The reading highlighted the weakest growth in factory activity since January due to softness in new orders growth (60.4 vs. 61.5). Going on, the latest jobs report for December looks disappointing. The U.S. economy added 199,000 jobs in December 2021, lagging market estimates of 400,000.
ETF Strategies to Follow
Let’s look at some safe ETF strategies that investors can play, keeping in mind certain burning issues that can flare up uncertainty in the near term:
Dividend Aristocrat ETFs to Combat COVID-19 Woes
Dividend aristocrats are blue-chip dividend-paying companies with a long history of increasing dividend payments year over year. Moreover, dividend aristocrat funds provide investors with dividend growth opportunities in comparison to other products in the space but might not necessarily have the highest yields.
‘Dividend aristocrats’ or ‘dividend growers’ are mostly deemed to be the smartest way to deal with market turmoil. Notably, the inclination toward dividend investing has been rising due to easing monetary policy on the global front, and market uncertainty triggered by the pandemic and deceleration in global growth.
These products also form a strong portfolio, with a higher scope of capital appreciation as against simple dividend-paying stocks or those with high yields. As a result, these products deliver a nice combination of annual dividend growth and capital-appreciation opportunity and are mostly good for risk-averse long-term investors.
Against this backdrop, let’s take a look at some ETFs that investors can consider 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 - Free Report) and iShares Core Dividend Growth ETF (DGRO) (read: 5 Top-Ranked ETFs to Add to Your Portfolio for 2022).
Low-Volatility ETFs to Manage Market Uncertainties
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 MSCI USA Min Vol Factor ETF (USMV - Free Report) , Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) , iShares MSCI Global Min Vol Factor ETF (ACWV) and Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) (read: ETF Market Outlook & Picks for 2022).
Quality ETFs to Enhance Portfolio Composition
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) , FlexShares Quality Dividend Index Fund (QDF), SPDR MSCI USA StrategicFactors ETF (QUS) and Barron's 400 ETF (BFOR) targeting this niche strategy. These could enjoy smooth trading and generate market-beating returns in the current market environment (read: Quality ETFs Appear Attractive as Fed Rate Hike Nears).