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Will Defensive ETFs Gain Further as S&P 500 Lull Not Over Yet?

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Wall Street was off to the worst start to a year since 1939 and the global market selloff will continue, according to Bank of America Corp. and Morgan Stanley, as quoted on Bloomberg. After an awful first quarter, the month of May is also proving rough for the markets, mainly due to the Fed’s biggest interest rate hike in 22 years. Markets are pricing in another 190-basis-point rate hike in 2022.

Even though it has declined 16% to start 2022, the S&P 500 trades at 16.8 times its projected earnings over the next 12 months, according to FactSet, as quoted on Wall Street Journal, which is still above the average multiple of 15.7 over the past 20 years, but down from the peak of 24.1 in September 2020. The S&P 500’s decline through Friday marked its worst year-to-date performance since 1970, according to Dow Jones Market Data.

Morgan Stanley’s Strategist Michael Wilson, who has long been a disbeliever of the decade-long bull run in U.S. stocks, said in a note that even after five weeks of declines, that he expects the S&P 500 to fall in the near term before climbing to 3,900 points next spring, which is still about 2.5% below current levels, hurt by slowing earnings growth and elevated volatility, as quoted on Bloomberg. He recommended defensive positioning with overweight in health care, utilities and real estate stocks.

Michael Mullaney, director of global markets research at Boston Partners, which manages $91 billion, thinks that the S&P 500 is fairly valued but expects valuations to fall further, as quoted on Wall Street Journal. This is because the valuation of equities tends to decline when rates rise, and earnings growth also slows down, even if the period is devoid of high inflation.

Plus, companies this earnings season have been mentioning “weak demand” at the highest rate since 2020, according to BofA Global Research, as mentioned on WSJ. Analysts at Citigroup Inc. wrote that the U.S. stock market entered a bubble zone in October 2020 and is now leaving that territory, as quoted on WSJ.

Against this backdrop, investors should be prepared for a further crash in the market, following recessionary talks. Long/Short ETFs could go a long way in restoring the value of one’s portfolio against this edgy backdrop.

ETFs in Focus

First Trust Alternative Absolute Return Strategy ETF (FAAR - Free Report) – Up 18.8% against a 15.6% decline in the S&P 500.

The First Trust Alternative Absolute Return Strategy ETF seeks to achieve long-term total return using a long/short commodities strategy. The fund yields 5.46% annually and charges 95 bps in fees.

AGFiQ US Market Neutral AntiBeta ETF (BTAL - Free Report) – Up 16.1% YTD

The AGFiQ US Market Neutral Anti-Beta ETF seeks performance results that correspond to the price and yield performance, before fees and expenses, of the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index. The expense ratio of BTAL is 2.53% annually.

Leatherback LongShort Alternative Yield ETF (LBAY - Free Report) – Up 15.2% YTD

The Leatherback Long/Short Alternative Yield ETF is an actively managed fund that seeks income generation and capital appreciation through shareholder-yielding equities and income-producing securities. The fund charges 146 bps in fees. It yields 2.66% annually.

AGFiQ Hedged Dividend Income ETF – Up 9.7% YTD

The underlying INDXX Hedged Dividend Income Index generates a high current yield and capital appreciation with risk similar to a corporate bond index. The index rebalances monthly by identifying the highest dividend stocks as long positions and the lowest dividend stocks as short positions. It charges 121 bps in fees.

LHA Market State Alpha Seeker ETF (MSVX - Free Report) – Up 4.1% YTD

The LHA Market State Alpha Seeker ETF seeks to provide positive returns across multiple market cycles that are generally not correlated to the U.S. equity or fixed income markets. Its expense ratio is 1.50%.