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5 Winning ETF Areas of a Lackluster June

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Wall Street delivered an awful performance in June. The S&P 500 (down 6.9%), the Dow Jones (down 5.4%), the Nasdaq (down 6.8%) and the Russell 2000 (down 7.3%) – have all given an extremely downbeat performance.

 The combination of factors such as 40-year high U.S. inflation, renewed Coronavirus cases in various parts of the world, the Russia-Ukraine war and the Fed’s aggressive tightening policy are weighing heavily on investor sentiment.

The sell-off in the S&P 500 Index aggravated when the Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest increase since 1994 — and signaled continued tightening ahead, which could further weigh on risk-on trade sentiments. The U.S. yield curve again inverted in June after April, giving cues of a likelihood of a recession.

Another Fed rate hike of 50 or 75 bps at the next meeting in July is likely. An increase in interest rates means higher loan rates for consumers and businesses, which in turn hurt economic growth. On the economic data front, U.S. retail sales unexpectedly fell 0.3% sequentially in May of 2022, marking the first decline so far this year. It follows a downwardly revised 0.7% increase in April, as high inflation, gasoline prices and borrowing costs hurt spending on non-essential goods.

Most investment banks are warning about an impending recession. Deloitte sees about a 15% chance of a U.S. economic recession, as quoted on a New York Times article. Morgan Stanley sees the probability of a recession in the next 12 months at about 30%, according to the bank’s models.

Goldman Sachs David Mericle and Ronnie Walker put the odds of a recession in the next year at 30%, up from 15% before. JPMorgan Chase economists raised their expected probability of a recession in the next one year to 35%. So, talks of a U.S. recession will be high in Q3.

Against this backdrop, below, we highlight a few winning ETF areas of June that trumped the S&P 500 smoothly.

Winning ETF Areas of June

Rate-Sensitive

The Fed had enacted three rate hikes so far this year and pushed through a total hike worth of 150 basis points, with June itself seeing a 75-bp rate hike. As a result, interest-hedged products won in June.

Simplify Interest Rate Hedge ETF (PFIX - Free Report) – Up 13.1%

Defensive

Ifthe volatility level is this high and markets crash, defensive ETFs would gain.

US Anti-Beta Fund Mkt Neutral QuantShares (BTAL) – Up 6.9%

U.S. Dollar

The U.S. dollar is gaining on a hawkish Fed and a general demand for a safe-haven asset amid uncertainty.

Wisdomtree Bloomberg U.S. Dollar Bullish Fund (USDU - Free Report) – Up 3.3%

DB US Dollar Index Bullish Fund Invesco (UUP) – Up 3.3%

Short-Term U.S. Treasury

As the Fed is hiking rates faster, yields on the ultra-short term treasury bonds are rising fast, which is beneficial for investors. These bonds are, in any case, less sensitive to interest rate risks.

iShares 0-3 Month Treasury Bond ETF (SGOV - Free Report) – Up 0.02%

China

Chinese equities started rebounding from late April as the nation’s top political leaders boost economic stimulus to promote growth. There could also be easing of the continued clampdown on various sectors. The economy has also been opening slowly from the COVID-induced lockdowns.

Global X MSCI China Consumer Discretionary ETF (CHIQ - Free Report) – Up 21.8%