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Is a Volatile Market Awaiting Us? ETF Strategies to Follow
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Wall Street has been kind to investors so far this year with the S&P 500 adding 18.2% this year and the tech-heavy Nasdaq adding 34%. Past month both indexes returned about 4% each. However, several market participants are now of the view that this rally has come to an end and challenging market may be upon us.
Why We Could Face Volatile Market Ahead
The U.S. economic indicators – be it jobs, inflation, home sales, or consumer sentiment – have been favorable for investors so far this year. The Fed also has been less-hawkish. But the trend may be turning now as some analysts believe that the impact of a resilient consumer base has already been priced in.
The Fed is likely to hike rates this month. We may see at least one more rate hike this year as the U.S. central bank remains steadfast in taming inflation. The inflation is expected to remain sticky for longer. Hence, the release of back-to-back upbeat U.S. economic indicator will give the Fed scope for hiking rates further.
Moreover, the first-half 2023 rally was based on a narrow market. This means that the gains in a few mega-cap stocks, including Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Tesla and Meta Platforms led to the S&P 500 rally. If such tech rally fails to continue, the real test and strength of the market will be before us. Al ready, Tesla started underperforming post Q2 earnings release.
The yield curve started to steepen since past week. This wreaked havoc on tech stocks too as the sector is high-growth in nature and currently boasts a rick valuation. Hence, asset classes that offer value should be tapped now.
Below we highlight a few ETF strategies that can be relied upon in the current scenario.
Value ETFs to Gain Precedence Over Growth?
Value investing is a strategy that involves selecting stocks that appear to trade for less than their intrinsic or book value. This method, popularized by Warren Buffett, the “Oracle of Omaha,” aims to identify undervalued companies with strong fundamentals — such as dividends, earnings, and sales — which are expected to produce strong future cash flows.
Moreover, value ETFs perform better in a rising rate environment than growth stocks. Vanguard Value ETF (VTV - Free Report) and Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) are examples of some value ETFs.
Play Quality ETFs
No wonder, a volatile environment calls for quality investments. Quality investing focuses on identifying companies with strong fundamentals, stable earnings, and durable competitive advantages. SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) and iShares MSCI USA Quality Factor ETF (QUAL - Free Report) may be helpful in the second half (read: Quality ETFs to Shine in Second Half of 2023?).
Time for Moat ETFs?
Another way to stay afloat amid market volatility is to stay invested in moat ETFs. The term “economic moat” was popularized by legendary investor Warren Buffett who said that he seeks "economic castles protected by unbreachable moats.”
In simple words, a moat is a unique competitive advantage that allows a company to outperform others in the same industry over time. VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report) and VanEck Morningstar International Moat ETF (MOTI - Free Report) are examples of such winning ETFs (read: Moat ETFs & Stocks: A Way to Fight Volatility).
Time for Low-Volatility ETFs?
Low-volatility ETFs have the potential to outpace the broader market in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio.
Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets. iShares MSCI USA Min Vol Factor ETF (USMV - Free Report) and Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) are two such examples in this regard.
High Dividend-Low Volatility ETFs in Focus
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 of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It yields 3.77% annually.
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Is a Volatile Market Awaiting Us? ETF Strategies to Follow
Wall Street has been kind to investors so far this year with the S&P 500 adding 18.2% this year and the tech-heavy Nasdaq adding 34%. Past month both indexes returned about 4% each. However, several market participants are now of the view that this rally has come to an end and challenging market may be upon us.
Why We Could Face Volatile Market Ahead
The U.S. economic indicators – be it jobs, inflation, home sales, or consumer sentiment – have been favorable for investors so far this year. The Fed also has been less-hawkish. But the trend may be turning now as some analysts believe that the impact of a resilient consumer base has already been priced in.
The Fed is likely to hike rates this month. We may see at least one more rate hike this year as the U.S. central bank remains steadfast in taming inflation. The inflation is expected to remain sticky for longer. Hence, the release of back-to-back upbeat U.S. economic indicator will give the Fed scope for hiking rates further.
Moreover, the first-half 2023 rally was based on a narrow market. This means that the gains in a few mega-cap stocks, including Apple, Microsoft, Google parent Alphabet, Amazon, Nvidia, Tesla and Meta Platforms led to the S&P 500 rally. If such tech rally fails to continue, the real test and strength of the market will be before us. Al ready, Tesla started underperforming post Q2 earnings release.
The yield curve started to steepen since past week. This wreaked havoc on tech stocks too as the sector is high-growth in nature and currently boasts a rick valuation. Hence, asset classes that offer value should be tapped now.
Below we highlight a few ETF strategies that can be relied upon in the current scenario.
Value ETFs to Gain Precedence Over Growth?
Value investing is a strategy that involves selecting stocks that appear to trade for less than their intrinsic or book value. This method, popularized by Warren Buffett, the “Oracle of Omaha,” aims to identify undervalued companies with strong fundamentals — such as dividends, earnings, and sales — which are expected to produce strong future cash flows.
Moreover, value ETFs perform better in a rising rate environment than growth stocks. Vanguard Value ETF (VTV - Free Report) and Invesco S&P 500 Enhanced Value ETF (SPVU - Free Report) are examples of some value ETFs.
Play Quality ETFs
No wonder, a volatile environment calls for quality investments. Quality investing focuses on identifying companies with strong fundamentals, stable earnings, and durable competitive advantages. SPDR MSCI USA StrategicFactors ETF (QUS - Free Report) and iShares MSCI USA Quality Factor ETF (QUAL - Free Report) may be helpful in the second half (read: Quality ETFs to Shine in Second Half of 2023?).
Time for Moat ETFs?
Another way to stay afloat amid market volatility is to stay invested in moat ETFs. The term “economic moat” was popularized by legendary investor Warren Buffett who said that he seeks "economic castles protected by unbreachable moats.”
In simple words, a moat is a unique competitive advantage that allows a company to outperform others in the same industry over time. VanEck Vectors Morningstar Wide Moat ETF (MOAT - Free Report) and VanEck Morningstar International Moat ETF (MOTI - Free Report) are examples of such winning ETFs (read: Moat ETFs & Stocks: A Way to Fight Volatility).
Time for Low-Volatility ETFs?
Low-volatility ETFs have the potential to outpace the broader market in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio.
Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets. iShares MSCI USA Min Vol Factor ETF (USMV - Free Report) and Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) are two such examples in this regard.
High Dividend-Low Volatility ETFs in Focus
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 of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It yields 3.77% annually.