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Investors Flocking to Defensive Strategies ETFs: Here's Why
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In a market rife with uncertainty, investors are turning to defensive strategies to shield their capital. Despite the S&P 500's 12% rally in 2023, ETF flows reveal a cautious investor base, hesitant to dive back into the equity market following a challenging 2022.
With the economy experiencing banking failure and recession fears looming large, investors seem skeptical to take a bet on aggressive strategies and increase their risk appetite. However, the current market rally and a surge in the technology sector fueled by a boom in artificial intelligence (AI) along with a slowdown in inflation and a likely pause in the hawkish policy of the Fed, seem to paint a different picture.
Let’s take a look at ETFs with preferred choices leaning toward bonds and defensive equity strategies that concentrate on stocks with lower volatility. These include Vanguard 500 Index Fund (VOO - Free Report) , iShares 20+ Year Treasury Bond ETF (TLT - Free Report) ), iShares MSCI USA Quality Factor ETF (QUAL - Free Report) , JPMorgan Equity Premium Income ETF (JEPI - Free Report) and iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) .
According to WSJ, the FactSet data through Jun 6 reveals that cash inflows to ETFs are running at their slowest pace since 2019 at $147.5 billion. This is down from the same period in each of the past two years. Money has been flowing into bonds and defensive equity strategies focused on less-volatile stocks, indicating that investors are cautious despite the fact that the S&P 500 and Nasdaq Composite Index are high this year.
Is the Market Highly Volatile?
Investors have faced a challenging year as economic and political uncertainties have flared up volatility in global stock markets. Increasing geopolitical uncertainty between the United States and China provides little help to ease the situation. The escalating battle over chips between Washington and Beijing continues to cast a shadow of doubt.
Will the AI Bubble Burst?
In spite of the hype for finding undervalued AI-backed investment options in the AI technology sector uncertainty over its usage and regulations raises more questions than answers.
According to Reuters, the rapid advancements in AI, exemplified by Microsoft-backed OpenAI's ChatGPT, are adding complexity to the task of establishing laws governing its usage. U.N. Secretary-General Antonio Guterres recently voiced support for forming an international AI watchdog, akin to the International Atomic Energy Agency, as proposed by certain AI industry leaders.
The emergence of generative AI technology, demonstrated by ChatGPT's ability to generate authoritative text from prompts, has captured public attention, making it the fastest-growing app in history within just six months. However, concerns have also grown regarding AI's potential for creating deepfake images and spreading misinformation.
British Prime Minister Rishi Sunak has expressed support for making Britain a hub for global AI safety regulation and will host a summit on coordinated international action to address AI risks. Meanwhile, the Federal Trade Commission has pledged to utilize existing laws to regulate AI's potential dangers, including the amplification of dominant firms' power and the acceleration of fraudulent activities.
ETFs in Focus
Vanguard 500 Index Fund (VOO - Free Report) - $11.3 billion Inflow YTD
The Vanguard S&P 500 ETF invests in stocks on the S&P 500 Index, representing 500 of the largest U.S. companies. With a basket of 505 securities, the fund has major allocations in information technology (25.83%), health care (14.42%) and financials (13.07%).
Taking in maximum money in 2023, VOO commands an asset base of $306.05 billion. Charging an annual fee of 0.03%, the fund has Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
The Vanguard S&P 500 ETF has generated returns of 12.90% year to date and 8.89% over the past year.
iShares 20+ Year Treasury Bond ETF (TLT - Free Report) - $10.8 billion Inflow YTD
The iShares 20+ Year Treasury Bond ETF tracks the investment results of the ICE U.S. Treasury 20+ Year Bond Index composed of U.S. Treasury bonds with remaining maturities greater than 20 years. Bonds have surged in popularity as yields reach pre-financial crisis levels, leading to substantial inflows into fixed income ETFs, fueled by the recent banking turmoil and recession fear.
With 37 securities in its basket, the fund has a weighted average maturity of 25.58 years. TLT has gathered $37.89 billion in its asset base and charges an annual fee of 0.15%. It has Zacks ETF Rank #4 (Sell) with a High risk outlook.
iShares 20+ Year Treasury Bond ETF has earned 3.69% year to date but has fallen by 8.43% over the past year.
The iShares MSCI USA Quality Factor ETF follows an index composed of large- and mid-cap stocks that exhibit favorable fundamentals, including low debt levels, steady profit growth, and a high return on equity. With 125 securities in its basket, the fund has major allocations to the information technology (28.88%), health care (13.44%) and financial (11.88%) sectors.
With an asset base of $30.29 billion, the fund charges an annual fee of 0.15%. iShares MSCI USA Quality Factor ETF has returned 14.17% year to date and 9.76% over the past year.
JPMorgan Equity Premium Income ETF employs an active strategy and has a basket of 134 securities. With a dividend yield of 11.9%, the fund has major allocations to information technology (14.01%), consumer non-durables (11.11%) and finance (10.81%).
With $26.67 billion in its asset base, JEPI is currently the largest actively managed ETF. JPMorgan Equity Premium Income ETF charges an annual fee of 0.35% and has generated 3.81% year to date and 6.98% over the past year.
iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) - $7.2 billion Inflow YTD
The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of the Bloomberg US Aggregate Bond Index, which measures the investment grade, U.S.-dollar-denominated, fixed-rate taxable bond market. The fund has a basket of 11,018 securities and a 42.01% weight in U.S. Treasuries.
With an asset base of $90.77 billion, the fund charges an annual fee of 0.03% and has a weighted average maturity of 8.67 years. iShares Core U.S. Aggregate Bond ETF has generated 2.28% year to date but has fallen by 1.34% over the past year.
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Investors Flocking to Defensive Strategies ETFs: Here's Why
In a market rife with uncertainty, investors are turning to defensive strategies to shield their capital. Despite the S&P 500's 12% rally in 2023, ETF flows reveal a cautious investor base, hesitant to dive back into the equity market following a challenging 2022.
With the economy experiencing banking failure and recession fears looming large, investors seem skeptical to take a bet on aggressive strategies and increase their risk appetite. However, the current market rally and a surge in the technology sector fueled by a boom in artificial intelligence (AI) along with a slowdown in inflation and a likely pause in the hawkish policy of the Fed, seem to paint a different picture.
Let’s take a look at ETFs with preferred choices leaning toward bonds and defensive equity strategies that concentrate on stocks with lower volatility. These include Vanguard 500 Index Fund (VOO - Free Report) , iShares 20+ Year Treasury Bond ETF (TLT - Free Report) ), iShares MSCI USA Quality Factor ETF (QUAL - Free Report) , JPMorgan Equity Premium Income ETF (JEPI - Free Report) and iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) .
According to WSJ, the FactSet data through Jun 6 reveals that cash inflows to ETFs are running at their slowest pace since 2019 at $147.5 billion. This is down from the same period in each of the past two years. Money has been flowing into bonds and defensive equity strategies focused on less-volatile stocks, indicating that investors are cautious despite the fact that the S&P 500 and Nasdaq Composite Index are high this year.
Is the Market Highly Volatile?
Investors have faced a challenging year as economic and political uncertainties have flared up volatility in global stock markets. Increasing geopolitical uncertainty between the United States and China provides little help to ease the situation. The escalating battle over chips between Washington and Beijing continues to cast a shadow of doubt.
Will the AI Bubble Burst?
In spite of the hype for finding undervalued AI-backed investment options in the AI technology sector uncertainty over its usage and regulations raises more questions than answers.
According to Reuters, the rapid advancements in AI, exemplified by Microsoft-backed OpenAI's ChatGPT, are adding complexity to the task of establishing laws governing its usage. U.N. Secretary-General Antonio Guterres recently voiced support for forming an international AI watchdog, akin to the International Atomic Energy Agency, as proposed by certain AI industry leaders.
The emergence of generative AI technology, demonstrated by ChatGPT's ability to generate authoritative text from prompts, has captured public attention, making it the fastest-growing app in history within just six months. However, concerns have also grown regarding AI's potential for creating deepfake images and spreading misinformation.
British Prime Minister Rishi Sunak has expressed support for making Britain a hub for global AI safety regulation and will host a summit on coordinated international action to address AI risks. Meanwhile, the Federal Trade Commission has pledged to utilize existing laws to regulate AI's potential dangers, including the amplification of dominant firms' power and the acceleration of fraudulent activities.
ETFs in Focus
Vanguard 500 Index Fund (VOO - Free Report) - $11.3 billion Inflow YTD
The Vanguard S&P 500 ETF invests in stocks on the S&P 500 Index, representing 500 of the largest U.S. companies. With a basket of 505 securities, the fund has major allocations in information technology (25.83%), health care (14.42%) and financials (13.07%).
Taking in maximum money in 2023, VOO commands an asset base of $306.05 billion. Charging an annual fee of 0.03%, the fund has Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
The Vanguard S&P 500 ETF has generated returns of 12.90% year to date and 8.89% over the past year.
iShares 20+ Year Treasury Bond ETF (TLT - Free Report) - $10.8 billion Inflow YTD
The iShares 20+ Year Treasury Bond ETF tracks the investment results of the ICE U.S. Treasury 20+ Year Bond Index composed of U.S. Treasury bonds with remaining maturities greater than 20 years. Bonds have surged in popularity as yields reach pre-financial crisis levels, leading to substantial inflows into fixed income ETFs, fueled by the recent banking turmoil and recession fear.
With 37 securities in its basket, the fund has a weighted average maturity of 25.58 years. TLT has gathered $37.89 billion in its asset base and charges an annual fee of 0.15%. It has Zacks ETF Rank #4 (Sell) with a High risk outlook.
iShares 20+ Year Treasury Bond ETF has earned 3.69% year to date but has fallen by 8.43% over the past year.
iShares MSCI USA Quality Factor ETF (QUAL - Free Report) - $9.7 billion Inflow YTD
The iShares MSCI USA Quality Factor ETF follows an index composed of large- and mid-cap stocks that exhibit favorable fundamentals, including low debt levels, steady profit growth, and a high return on equity. With 125 securities in its basket, the fund has major allocations to the information technology (28.88%), health care (13.44%) and financial (11.88%) sectors.
With an asset base of $30.29 billion, the fund charges an annual fee of 0.15%. iShares MSCI USA Quality Factor ETF has returned 14.17% year to date and 9.76% over the past year.
JPMorgan Equity Premium Income ETF (JEPI - Free Report) - $9.2 billion Inflow YTD
JPMorgan Equity Premium Income ETF employs an active strategy and has a basket of 134 securities. With a dividend yield of 11.9%, the fund has major allocations to information technology (14.01%), consumer non-durables (11.11%) and finance (10.81%).
With $26.67 billion in its asset base, JEPI is currently the largest actively managed ETF. JPMorgan Equity Premium Income ETF charges an annual fee of 0.35% and has generated 3.81% year to date and 6.98% over the past year.
iShares Core U.S. Aggregate Bond ETF (AGG - Free Report) - $7.2 billion Inflow YTD
The iShares Core U.S. Aggregate Bond ETF seeks to track the investment results of the Bloomberg US Aggregate Bond Index, which measures the investment grade, U.S.-dollar-denominated, fixed-rate taxable bond market. The fund has a basket of 11,018 securities and a 42.01% weight in U.S. Treasuries.
With an asset base of $90.77 billion, the fund charges an annual fee of 0.03% and has a weighted average maturity of 8.67 years. iShares Core U.S. Aggregate Bond ETF has generated 2.28% year to date but has fallen by 1.34% over the past year.