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4 ETFs to Invest in on Rising Market Volatility

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Volatility has taken the front seat this year, making the stock market extremely volatile. A combination of factors like the Fed rate hike plan, higher inflation and now geopolitics has led to risk-off trade.

This has prompted investors to re-access their portfolio, leading to higher demand for lower-risk securities. As a result, iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) , iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , Vanguard Value ETF (VTV - Free Report) and Vanguard Dividend Appreciation ETF (VIG - Free Report) from different segments of the investing world seem compelling picks.

In the latest chaos, the Russia-Ukraine crisis has escalated after US Secretary of State Antony Blinken announced the relocation of U.S. diplomatic operations to western Ukraine in a possible sign of an imminent Russian invasion (read: Bet on These 5 ETFs to Combat the Current Market Tantrums).

Fed Chair Jerome Powell, in the latest FOMC meeting, stated that "the economy no longer needs sustained high levels of monetary policy support," and that "it will soon be appropriate to raise rates for the first time in more than three years” to combat skyrocketing inflation. The consumer price index jumped 7.5% year over year in January, marking the biggest 12-month gain since February 1982. The high inflation has set the stage for the first interest rate hike as soon as March.

Wall Street analysts are predicting as many as seven rate hikes this year. Goldman Sachs now projects seven rate hikes versus five previously before the new inflation data while Bank of America also sees seven rate hikes this year. According to the CME FedWatch tool, the market is pricing in seven interest rate hikes for 2022. Markets are now expecting a 50-bps rate increase at the central bank’s March meeting. The rate hikes will surely weigh on future economic growth, resulting in a decline in stocks.

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

Low-volatility ETFs have the potential to outpace the broader market in an uncertain market 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 the defensive sectors that usually have a higher distribution yield than the broader markets. While there are several options, iShares Edge MSCI Min Vol USA ETF with AUM of $28 billion and an average daily volume of 4 million shares is the most popular ETF. The fund offers exposure to stocks that have lower volatility characteristics relative to the broader U.S. equity market.

iShares Edge MSCI Min Vol USA ETF tracks the MSCI USA Minimum Volatility Index, holding 172 stocks in its basket. The product charges 15 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook (read: Should You Invest in Low Volatility ETFs Now?).

Quality - iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report)

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track 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.

With AUM of $22.6 billion, iShares Edge MSCI USA Quality Factor ETF provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index and holds 125 stocks in its basket. iShares Edge MSCI USA Quality Factor ETF charges 15 bps in annual fees and trades in an average daily volume of 1.5 million shares.

Value – Vanguard Value ETF (VTV - Free Report)

Value stocks have proven to be outperformers over the long term and are less susceptible to trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.

Vanguard Value ETF targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 351 stocks in its basket, with each accounting for no more than 3% of the assets. Vanguard Value ETF has AUM of $100 billion and charges 4 bps in annual fees. The product trades in volume of 4 million shares per day on average and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook (read: Top-Ranked Value ETFs to Gift This Valentine's).

Dividend - Vanguard Dividend Appreciation ETF (VIG - Free Report)

The dividend-paying securities are the major sources of consistent income for investors, when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer 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 the dividend space has been crowded, ETFs with stocks that have a strong history of dividend growth like Vanguard Dividend Appreciation ETF seem to be good picks. It holds 267 stocks in its basket with AUM of $65.5 million. Vanguard Dividend Appreciation ETF trades in volume of 2.2 million shares a day on average and charges 6 bps in annual fees. It has a Zacks ETF Rank #1 with a Medium risk outlook.

Bottom Line

These products could be worthwhile for low risk-tolerant investors and have the potential to outperform the broader market, especially if economic and political issues continue to dampen sentiments.