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The possibility of the United States defaulting on its debt is a daunting prospect for many investors. The US government could run out of funds to pay its bills as early as June 1st if the debt ceiling is not raised by Congress, according to Treasury Secretary Janet Yellen. Republicans and Democrats have been debating how to raise the debt ceiling for months, but they have so far made little progress toward reaching an agreement.
President Biden has invited top lawmakers from both parties to discuss the matter next week. This estimate is shorter than previously anticipated, which puts the US at risk of defaulting on its debt for the first time. Republicans want spending cuts in exchange for raising the borrowing limit, while Democrats want to raise it without any conditions. The impasse has caused concern in the bond market and may have dangerous financial and economic consequences, including a potential global crisis.
It's uncertain what would occur if the country were to default on its debt since it has never transpired previously. However, a near miss in 2011 created turmoil in the financial markets, resulting in Standard & Poor's lowering the US' credit rating from AAA to AA+. According to Moody’s, the unemployment rate would rise to about 5% and the economy would contract by nearly half a percent, if U.S. defaults, as quoted on CNN.
Moody's also predicts that if the deadlock persists for six weeks, over 7 million jobs will be lost, causing the unemployment rate to surge beyond 8%, and the economy to shrink by over 4%. The repercussions of this event would persist for ten years. Though we believe the U.S. government will reach a solution to this problem, we highlight below a few ETFs that could gain/lose ahead on chances of the first-ever U.S. debt default.
Likely Losers
U.S. Dollar
In such a scenario, the value of the dollar could plummet. While it is impossible to predict the exact outcome of a U.S. debt default, investors can take certain steps to minimize the impact on their portfolio. Invesco DB US Dollar Index Bearish ETF (UDN - Free Report) will likely gain if such a situation arises (read: Ride Out Talks of De-Dollarization With 5 ETF Strategies).
Likely Winners
International ETFs
Investors should consider increasing their holdings in non-U.S. assets. In the event of a U.S. default, the value of the dollar is likely to decline, while the value of other currencies, such as the Euro or the Japanese Yen, may rise. Investing in foreign stocks, bonds, and other assets denominated in other currencies can help to offset any losses incurred due to a decline in the dollar's value. Invesco S&P International Developed Low Volatility ETF (IDLV - Free Report) , iShares International Dividend Growth ETF (IGRO - Free Report) and iShares MSCI Emerging Markets ETF (EEM - Free Report) could be winning options.
Multi-Asset ETFs
Investors should focus on diversification. A well-diversified portfolio will spread risk across multiple asset classes, reducing the impact of any one event on the overall portfolio. Diversification can be achieved by investing in a variety of stocks, bonds, real estate, and other asset classes. iShares Core Conservative Allocation ETF (AOK - Free Report) and iShares Core Moderate Allocation ETF (AOM - Free Report) are two such intriguing bets. These ETFs yields close to 2.50%.
Alternative Assets
Investors may want to consider holding alternative investments such as commodities or cryptocurrencies. These assets are not directly tied to the performance of the U.S. economy and may hold their value better in a default scenario. SPDR Gold Shares (GLD - Free Report) and Valkyrie Bitcoin Miners ETF (WGMI - Free Report) could help investors in such cases. However, it is important to note that these investments can be volatile and should be approached with caution.
S&P 500
Investors should avoid panic selling. In the event of a U.S. default, markets are likely to experience significant volatility. However, history has shown that markets eventually recover, and panic selling can often lead to locking in losses. Instead, investors should focus on their long-term goals and stick to their investment plan.
The S&P 500 stocks are large-caps and have high exposure in foreign economies. These stocks tend to perform well in a falling dollar environment. Hence, one should not stay away from S&P 500. After all, Vanguard S&P 500 ETF (VOO - Free Report) has added about $3.3 billion in assets past month and has fetched about $598.4 million in assets past week. This indicates investors’ faith on the index.
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ETFs to Win/Lose from the Debt Ceiling Drama
The possibility of the United States defaulting on its debt is a daunting prospect for many investors. The US government could run out of funds to pay its bills as early as June 1st if the debt ceiling is not raised by Congress, according to Treasury Secretary Janet Yellen. Republicans and Democrats have been debating how to raise the debt ceiling for months, but they have so far made little progress toward reaching an agreement.
President Biden has invited top lawmakers from both parties to discuss the matter next week. This estimate is shorter than previously anticipated, which puts the US at risk of defaulting on its debt for the first time. Republicans want spending cuts in exchange for raising the borrowing limit, while Democrats want to raise it without any conditions. The impasse has caused concern in the bond market and may have dangerous financial and economic consequences, including a potential global crisis.
It's uncertain what would occur if the country were to default on its debt since it has never transpired previously. However, a near miss in 2011 created turmoil in the financial markets, resulting in Standard & Poor's lowering the US' credit rating from AAA to AA+. According to Moody’s, the unemployment rate would rise to about 5% and the economy would contract by nearly half a percent, if U.S. defaults, as quoted on CNN.
Moody's also predicts that if the deadlock persists for six weeks, over 7 million jobs will be lost, causing the unemployment rate to surge beyond 8%, and the economy to shrink by over 4%. The repercussions of this event would persist for ten years. Though we believe the U.S. government will reach a solution to this problem, we highlight below a few ETFs that could gain/lose ahead on chances of the first-ever U.S. debt default.
Likely Losers
U.S. Dollar
In such a scenario, the value of the dollar could plummet. While it is impossible to predict the exact outcome of a U.S. debt default, investors can take certain steps to minimize the impact on their portfolio. Invesco DB US Dollar Index Bearish ETF (UDN - Free Report) will likely gain if such a situation arises (read: Ride Out Talks of De-Dollarization With 5 ETF Strategies).
Likely Winners
International ETFs
Investors should consider increasing their holdings in non-U.S. assets. In the event of a U.S. default, the value of the dollar is likely to decline, while the value of other currencies, such as the Euro or the Japanese Yen, may rise. Investing in foreign stocks, bonds, and other assets denominated in other currencies can help to offset any losses incurred due to a decline in the dollar's value. Invesco S&P International Developed Low Volatility ETF (IDLV - Free Report) , iShares International Dividend Growth ETF (IGRO - Free Report) and iShares MSCI Emerging Markets ETF (EEM - Free Report) could be winning options.
Multi-Asset ETFs
Investors should focus on diversification. A well-diversified portfolio will spread risk across multiple asset classes, reducing the impact of any one event on the overall portfolio. Diversification can be achieved by investing in a variety of stocks, bonds, real estate, and other asset classes. iShares Core Conservative Allocation ETF (AOK - Free Report) and iShares Core Moderate Allocation ETF (AOM - Free Report) are two such intriguing bets. These ETFs yields close to 2.50%.
Alternative Assets
Investors may want to consider holding alternative investments such as commodities or cryptocurrencies. These assets are not directly tied to the performance of the U.S. economy and may hold their value better in a default scenario. SPDR Gold Shares (GLD - Free Report) and Valkyrie Bitcoin Miners ETF (WGMI - Free Report) could help investors in such cases. However, it is important to note that these investments can be volatile and should be approached with caution.
S&P 500
Investors should avoid panic selling. In the event of a U.S. default, markets are likely to experience significant volatility. However, history has shown that markets eventually recover, and panic selling can often lead to locking in losses. Instead, investors should focus on their long-term goals and stick to their investment plan.
The S&P 500 stocks are large-caps and have high exposure in foreign economies. These stocks tend to perform well in a falling dollar environment. Hence, one should not stay away from S&P 500. After all, Vanguard S&P 500 ETF (VOO - Free Report) has added about $3.3 billion in assets past month and has fetched about $598.4 million in assets past week. This indicates investors’ faith on the index.