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ETF Strategies to Tide Over the Ongoing Banking Crisis
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Given the ongoing global banking crisis, stock volatility will remain rife in the coming days. Markets will definitely try to bounce back on every single good news coming from governments and big banks (as we have seen in the recent past with even critically ailing regional banking ETFs trying to recoup losses). Yet, nothing is clear yet, and no one knows how long it will take to return to the previous form.
The run on SVB started on Mar 9, after the bank’s strategic update to investors revealed that it had sold substantially all of its Available for Sale securities portfolio of $21 billion, most of which were U.S. treasury bonds. SVB had locked these treasuries at a yield of 1.79% and had to book a loss of $1.8 billion on this transaction due to a spike in rates past year.
The Federal Deposit Insurance Corp’s (FDIC) retaining of those securities would safeguard the acquirers from not booking a loss on them. So, all in all, the higher rates, indirectly, have caused a long-feared crisis in the market and economy. Maybe, smaller banks felt the heat first for holding low-yielding treasury bonds. But the fact is that big banks too have held it. So, the journey from here is less likely to be smooth.
Goldman Sachs cut the GDP forecast because of stress on small banks. Goldman Sachs lowered its growth forecast by 0.3 percentage points to 1.2% for 2023. Against this backdrop, below, we highlight a few ETF strategies that can be relied upon.
Tap Money Market ETFs
The road ahead is a bit unclear. Hence, we believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the short-term interest rates are still high due to a hawkish Fed and investors will enjoy decent yields even with ultra-short-term bonds. No wonder, SPDR Bloomberg 1-3 Month T-Bill ETF (BIL - Free Report) has emerged as a huge asset-generator amid the banking crisis.
Investors can play Columbia Multi-Sector Municipal Income ETF (MUST - Free Report) (yields 1.90% annually), First Trust Low Duration Strategic Focus ETF (LDSF - Free Report) (yields 2.87% annually) and JPMorgan Ultra-Short Income ETF (JPST - Free Report) (yields 2.38% annually).
Dividend Growth ETFs & High Dividend- Low Volatility ETFs
Companies that have the willingness and ability to pay and grow their dividend over time are called dividend aristocrats. Such activities make them quality picks. U.S.-based dividend growth ETFs include SPDR S&P Dividend ETF (SDY - Free Report) , which charges 35 bps in fees and yields 3.29% annually.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report) is a winning combination of high dividend and low volatility – the need of the hour. The S&P 500 Low Volatility High Dividend Index comprises 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It yields 4.26% annually and charges 30 bps in fees.
Play Quality ETFs
Goes without saying that such a volatile environment calls for quality investments. SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) measures the equity market performance of large and mid-cap companies across the U.S. equity market. It aims to represent the performance of a combination of three factors: value, quality and low volatility.
There is VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report) . The fund follows an index that tracks the overall performance of the “attractively priced companies with sustainable competitive advantages.” As a result, this fund calls for quality exposure. MOAT tracks the overall performance of the 20 most attractively priced companies with sustainable competitive advantages.
Cash-Cow ETFs
Per Investopedia, “a cash cow can refer to a business, product or asset that, once acquired and paid off, will produce consistent cash flow over its lifespan.” In other words, these companies are known for continuous positive cash flows, reflecting their inherent strength. Since we know that a cash cushion is always needed in a rough market, one can easily look at the indicators related to cash flows to measure a company's performance.
Pacer US Cash Cows 100 ETF (COWZ - Free Report) gives exposure to large and mid-capitalization U.S. companies with high free cash flow yields. It charges 49 bps in fees and yields 2.04% annually. Meanwhile, Pacer Global Cash Cows Dividend ETF (GCOW - Free Report) offers exposure to global companies with high dividend yields backed by a high free cash flow yield. The fund charges 60 bps in fees and yields 4.38% annually.
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ETF Strategies to Tide Over the Ongoing Banking Crisis
Given the ongoing global banking crisis, stock volatility will remain rife in the coming days. Markets will definitely try to bounce back on every single good news coming from governments and big banks (as we have seen in the recent past with even critically ailing regional banking ETFs trying to recoup losses). Yet, nothing is clear yet, and no one knows how long it will take to return to the previous form.
U.S. regulators are considering retaining ownership of securities owned by Signature Bank and Silicon Valley Bank (“SVB”) to let smaller banks participate in the auction for the collapsed lenders while keeping doors open for big banks.
The run on SVB started on Mar 9, after the bank’s strategic update to investors revealed that it had sold substantially all of its Available for Sale securities portfolio of $21 billion, most of which were U.S. treasury bonds. SVB had locked these treasuries at a yield of 1.79% and had to book a loss of $1.8 billion on this transaction due to a spike in rates past year.
The Federal Deposit Insurance Corp’s (FDIC) retaining of those securities would safeguard the acquirers from not booking a loss on them. So, all in all, the higher rates, indirectly, have caused a long-feared crisis in the market and economy. Maybe, smaller banks felt the heat first for holding low-yielding treasury bonds. But the fact is that big banks too have held it. So, the journey from here is less likely to be smooth.
Goldman Sachs cut the GDP forecast because of stress on small banks. Goldman Sachs lowered its growth forecast by 0.3 percentage points to 1.2% for 2023. Against this backdrop, below, we highlight a few ETF strategies that can be relied upon.
Tap Money Market ETFs
The road ahead is a bit unclear. Hence, we believe cash and short-dated fixed income may play a greater role in adding stability to a portfolio. This is especially true given that the short-term interest rates are still high due to a hawkish Fed and investors will enjoy decent yields even with ultra-short-term bonds. No wonder, SPDR Bloomberg 1-3 Month T-Bill ETF (BIL - Free Report) has emerged as a huge asset-generator amid the banking crisis.
Investors can play Columbia Multi-Sector Municipal Income ETF (MUST - Free Report) (yields 1.90% annually), First Trust Low Duration Strategic Focus ETF (LDSF - Free Report) (yields 2.87% annually) and JPMorgan Ultra-Short Income ETF (JPST - Free Report) (yields 2.38% annually).
Dividend Growth ETFs & High Dividend- Low Volatility ETFs
Companies that have the willingness and ability to pay and grow their dividend over time are called dividend aristocrats. Such activities make them quality picks. U.S.-based dividend growth ETFs include SPDR S&P Dividend ETF (SDY - Free Report) , which charges 35 bps in fees and yields 3.29% annually.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD - Free Report) is a winning combination of high dividend and low volatility – the need of the hour. The S&P 500 Low Volatility High Dividend Index comprises 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It yields 4.26% annually and charges 30 bps in fees.
Play Quality ETFs
Goes without saying that such a volatile environment calls for quality investments. SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) measures the equity market performance of large and mid-cap companies across the U.S. equity market. It aims to represent the performance of a combination of three factors: value, quality and low volatility.
There is VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report) . The fund follows an index that tracks the overall performance of the “attractively priced companies with sustainable competitive advantages.” As a result, this fund calls for quality exposure. MOAT tracks the overall performance of the 20 most attractively priced companies with sustainable competitive advantages.
Cash-Cow ETFs
Per Investopedia, “a cash cow can refer to a business, product or asset that, once acquired and paid off, will produce consistent cash flow over its lifespan.” In other words, these companies are known for continuous positive cash flows, reflecting their inherent strength. Since we know that a cash cushion is always needed in a rough market, one can easily look at the indicators related to cash flows to measure a company's performance.
Pacer US Cash Cows 100 ETF (COWZ - Free Report) gives exposure to large and mid-capitalization U.S. companies with high free cash flow yields. It charges 49 bps in fees and yields 2.04% annually. Meanwhile, Pacer Global Cash Cows Dividend ETF (GCOW - Free Report) offers exposure to global companies with high dividend yields backed by a high free cash flow yield. The fund charges 60 bps in fees and yields 4.38% annually.