Wall Street again witnessed carnage as investors started getting jitters from the latest comments of a Fed official ahead of the release of FOMC minutes. All the three broad market indices ended the session in red on Apr 5. The Dow Jones Industrial Average was down 0.8% on the same day. The other two broad market indices, the S&P 500 and the Nasdaq Composite, also declined 1.3% and 2.3%, respectively, on Apr 5.
Federal Reserve Governor Lael Brainard has hinted at
the Fed's possibility of turning super hawkish to control the hot inflation readings, which might rise further. The otherwise dovish Fed member, Brainard, mentioned that the balance sheet holding around $9 trillion in assets might be “rapidly” reduced by the Federal Reserve, per a CNBC article. It may begin doing so in May. She also indicated that further rate hikes might be more than 0.25%.
In this regard, she mentioned that “The [FOMC] will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting. Given that the recovery has been considerably stronger and faster than in the previous cycle, I expect the balance sheet to shrink considerably more rapidly than in the previous recovery, with significantly larger caps and a much shorter period to phase in the maximum caps compared with 2017-19,” as stated in a CNBC article.
Investors will be keenly waiting for the release of the FOMC minutes on Apr 6 that can give further insights into the Federal Reserve’s stand on the rate hike. However, the Fed Chairman Jerome Powell had recently mentioned that the central bank is ready to take more aggressive actions if required to control the high inflation levels.
Notably, the Fed approved a 0.25 percentage point rate hike (the first increase since December 2018) on Mar 16. Following this hike, the benchmark interest rates fall into a 0.25-0.5% range. At the same time, the central bank has informed about plans to increase interest rates six times this year.
Apart from the Fed hike's uncertainty, the investment world is clouded by several other factors like the Russia-Ukraine crisis, recession fears from the inverted yield curve, and resurging coronavirus cases in China. Despite taking strict lockdown measures, COVID-19 cases in Shanghai are increasing. Meanwhile, Russia’s atrocities on Ukrainians, labeled as “war crimes,” are being highly condemned by global leaders. After seeing the images from Bucha, northwest of Kyiv,some global leaders have proposed the idea of imposing more sanctions on Russia.
Commenting on the current market conditions, Mark Zandi, chief economist at Moody’s Analytics, has said that “Ultimately, the way this is going to work, the economy is going to slow, the stock market has to reflect that. So I do expect the stock market to have a tough few months here as it ultimately adjusts to what the Fed is doing and will do going forward,” per a CNBC article.
Studying the backdrop, let’s focus on some ETF areas that can be safe bets:
iShares Core Dividend Growth ETF ( DGRO Quick Quote DGRO - Free Report)
Amid a complicated market environment, investors prefer investments that can be a reliable source of consistent and dependable income. In such a scenario, dividend aristocrats can come to the rescue. These are basically blue-chip dividend-paying companies with a long history of increasing dividend payments year over year. Moreover, dividend aristocrat funds give investors dividend growth opportunities compared to other products in the space but might not necessarily have the highest yields. These products also form a strong portfolio, with a higher scope of capital appreciation 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.
iShares Core Dividend Growth ETF provides exposure to companies boasting a history of sustained dividend growth by tracking the Morningstar US Dividend Growth Index. DGRO has AUM of $23.65 billion. iShares Core Dividend Growth ETF charges 8 basis points (bps) in fees per year (read:
Guide to Dividend Aristocrat ETFs). Vanguard Health Care ETF ( VHT Quick Quote VHT - Free Report)
The healthcare sector is a good defensive investment option as several investors believe consumers will have to purchase healthcare products even during tough and uncertain times. Currently, the Russia-Ukraine war crisis and the chances of a Fed rate hike are causing uncertainty in the markets. The pandemic has also triggered a race to introduce vaccines, tests and treatment options, opening up investment opportunities in the healthcare sector.
Vanguard Health Care ETF seeks to track the performance of the MSCI US Investable Market Health Care 25/50 Index. VHT has AUM of $17.32 billion and charges 10 bps of fees (read:
China's COVID-19 Lockdown Brings Back Focus on Healthcare ETFs). iShares U.S. Consumer Staples ETF ( IYK Quick Quote IYK - Free Report)
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. Investors can consider parking their money in the non-cyclical consumer staples sector during an economic recession. This high-quality sector, which is largely defensive, has a low correlation factor with economic cycles.
iShares U.S. Consumer Staples ETF seeks to track the investment results of an index composed of U.S. equities in the consumer staples sector. IYK has AUM of $1.03 billion and charges 41 bps of fees (read:
Bet on Consumer Staples ETFs as Recession Fears Intensify). FlexShares Quality Dividend Index Fund ( QDF Quick Quote QDF - Free Report)
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. Compared to plain vanilla funds, these products help lower volatility and perform better 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.
FlexShares Quality Dividend Index Fund seeks investment results that generally correspond to the price and yield performance, before fees and expenses, of the Northern Trust Quality Dividend Index. With AUM of $1.72 billion, QDF charges 0.37% of fees.
iShares MSCI Global Min Vol Factor ETF ( ACWV Quick Quote ACWV - Free Report)
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. These funds are less cyclical, providing more stable cash flow than the overall market.
iShares MSCI Global Min Vol Factor ETF provides exposure to global stocks with potentially less risk. ACWV tracks the MSCI All Country World Minimum Volatility Index and holds 400 securities. iShares MSCI Global Min Vol Factor ETF has AUM of $4.99 billion and charges 20 bps in annual fees.
iShares S&P 500 Value ETF ( IVE Quick Quote IVE - Free Report)
It is worth noting here that value investing seems more lucrative, given the rebounding U.S. economy, the expectation of higher inflation and the chances of Fed interest rate hikes. Moreover, value stocks seek to capitalize on market inefficiencies. They can deliver higher returns with lower volatility than their growth and blend counterparts. Additionally, value stocks are less exposed to trending markets and their dividend payouts offer a shield against market turbulence.
The iShares S&P 500 Value ETF seeks to track the investment results of an index composed of large-capitalization U.S. equities that exhibit value characteristics. With AUM of $26.03 billion, it charges 18 bps in expense ratio.