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ETF Strategies to Conquer Geopolitical & Fed Rate Hike Worries

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Wall Street continues to face the burden of intensifying tensions between Ukraine and Russia. At the same time, investors are eyeing the Federal Reserve’s next move to hike rates. Amid the uncertainty, the three major broad market indices ended in the red last week. The Dow Jones Industrial Average has lost 1.9% in the last week ending Feb 18. Also, the S&P 500 and Nasdaq Composite were down 1.6% and 1.8%, respectively, in the same period.

Notably, market participants are expecting Fed to start increasing interest rates from the next month. In fact, traders are speculating a 100% probability of a Fed rate hike post the March 15-16 meeting, per the CME Group’s FedWatch tool (according to a CNBC article). Notably, the Fed has already started tapering bond purchases, which it expects to complete by this March.

In this regard, Strategas investment strategist Ryan Grabinski has mentioned that “All eyes are on the Fed. As of today, the market is expecting the Fed to raise interest rates at nearly every meeting this year. Despite that, we left Monetary Policy as Favorable for now because the Fed is continuing to purchase Treasuries (an accommodative policy action),” as mentioned in a CNBC article.

The escalation was witnessed amid Russia-Ukraine-related tensions after some relieving announcements from U.S. President Joe Biden that he was ready to meet “in principle” with Russian President Vladimir Putin to discuss the situation and de-escalate it via diplomacy.

According to the latest updates, President Putin has reportedly announced that he would identify the independence of two breakaway regions in Ukraine, mostly disturbing peace meetings with President Joe Biden, per a CNBC article. This move led to a new round of speculations that Biden might order sanctions on separatist regions of Ukraine. Also, it is being thought that European Union might also take additional measures, according to the article mentioned above. In fact, President Putin ordered Russian forces into the two breakaway regions.

Against this backdrop, let’s take a look at some ETF strategies that investors can consider to tackle the geopolitical tensions:

Dividend Aristocrat ETFs to Combat Geopolitical Worries

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), ProShares S&P 500 Dividend Aristocrats ETF (NOBL) and iShares Core Dividend Growth ETF (DGRO) (read: Guide to Dividend Aristocrat ETFs).

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: 5 Low-Volatility ETFs to Bet on Rising Worries).

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: 4 ETFs to Invest in on Rising Market Volatility).

Consumer Staple ETFs for Stability

The consumer staples sector is known for its non-cyclical nature and acts as a safe haven during unstable market conditions. Moreover, like utility, consumer staples is considered a stable sector for the long term as its players are likely to offer decent returns. During an economic recession, investors can consider parking their money in the non-cyclical consumer staples sector. This high-quality sector, which is largely defensive, has a low correlation factor with economic cycles.

Here we highlight certain ETFs that can be safe bets like The Consumer Staples Select Sector SPDR Fund (XLP - Free Report) , Vanguard Consumer Staples ETF (VDC - Free Report) , Fidelity MSCI Consumer Staples Index ETF (FSTA) and iShares U.S. Consumer Staples ETF (IYK).

Let’s take a look at some ETF areas for managing the market’s Fed rate hike worries:

Banking ETFs in Focus

The shift toward a tighter monetary policy will push yields higher, thereby helping the financial sector. This is because rising rates will help in boosting profits for banks, insurance companies, discount brokerage firms and asset managers. The steepening of the yield curve (the difference between short and long-term interest rates) is likely to support banks’ net interest margins. As a result, net interest income, which constitutes a chunk of banks’ revenues, is likely to receive support from the steepening of the yield curve and a modest rise in loan demand.

Against this backdrop, let’s take a look at some banking ETFs that can gain from the current environment, like SPDR S&P Regional Banking ETF (KRE - Free Report) , SPDR S&P Bank ETF (KBE - Free Report) , Invesco KBW Bank ETF (KBWB) (read: 5 ETF Ways to Play Fed Rates Hike Plans).

Energy ETFs to Watch For

Investors are closely tracking the energy sector, which is showing strength as global demand and economic growth levels are on the path of recovery from the pandemic lows. Oil prices have been rising since the beginning of 2022. The upside in crude oil prices is being triggered by factors like easing Omicron variant concerns, geopolitical tensions and less OPEC+ output.

Against the bullish energy sector backdrop, let’s take a look at some energy ETFs that are worth adding to your portfolio for boosting returns like Invesco Dynamic Energy Exploration & Production ETF (PXE - Free Report) , Vanguard Energy ETF (VDE - Free Report) and The Energy Select Sector SPDR Fund (XLE).