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Despite the Fed’s most aggressive tightening campaign in decades, the U.S. economy has displayed remarkable resilience, characterized by a robust labor market and strong consumer spending. Inflation too has steadily decreased since reaching its highest point in June 2022.
But then, the market lost momentum in the second half of this year due to sticky inflation which led to apprehensions of higher-for-longer interest rates. After posting its best first eight months of the year since 2003, the tech-heavy Nasdaq index struggled in the past few days due to rising rate worries (read: Fed Warns of More Rate Hikes to Tame Inflation: ETFs to Buy).
Erosion of Consumer Savings
One significant factor contributing to the likely stock market volatility is the weakening consumer. JPMorgan's Kolanovic highlights that consumers have utilized their excess savings from the pandemic, as quoted on Business Insider, published on Yahoo.
This economic tailwind has now dissipated, potentially leading to a further softening of consumer spending. With student loan payments set to restart in October, there's an added concern about reduced consumer disposable income.
Reduced Stock Buybacks and Valuations
Stock buyback programs, a tool often used by companies to support stock prices, are facing challenges. Overvaluations and the new buyback tax now make buybacks less attractive for companies especially when those are financed by debt (read: 6 Reasons Why Stocks Could Remain Subdued: ETFs to Gain).
Global Economic Concerns
One of the biggest concerns for investors lately is China's economic slowdown. While several market experts opine that China may surprise to the upside as pessimism appears overdone, worries regarding China’s economic health are still present. iShares MSCI China ETF (MCHI - Free Report) is off 1.6% past week (read: China ETFs in Better Shape on Property Support: Can the Rally Last?).
Low-Beta ETFs: A Safe Short-Term Choice?
Against this backdrop, we highlight a few low-beta ETFs for investors that could be played until no sturdy market rally is ensured. Low or negative beta products demonstrate higher degrees of stability in comparison to their market-responsive counterparts.
Understanding Beta
Beta measures the volatility or risk of a particular asset compared to the market. In other words, beta measures the extent of a security’s price movement relative to the market. In this article, we are considering the S&P 500 as the market.
If a stock has a beta of 1, then the price of the stock will move with the market. So, the stock is more volatile than the market if its beta is more than 1. In the same way, the stock is not as volatile as the market if its beta is less than 1.
For example, if the market offers a return of 20%, a stock with a beta of 3 will return 60%, which is overwhelming. Similarly, when the market slips 20%, the stock will sink 60%, which is devastating.
The underlying S-Network BlackSwan Core Total Return Index seeks uncapped exposure to the S&P 500, while buffering against the possibility of significant losses. The fund charges 49 bps in fees and yields 3% annually.
The actively-managed Changebridge Long/Short Equity ETF seeks long-term capital appreciation while minimizing volatility. The expense ratio of the fund is 1.70%.
FlexShares High Yield Value-Scored Bond ETF (HYGV - Free Report) – Beta: 0.49
The underlying Northern Trust High Yield Value-Scored US Corporate Bond Index measures the performance of a diversified universe of high yield, US-dollar denominated bonds of companies exhibiting favorable fundamental qualities, market valuations and liquidity. The fund charges 39 bps in fees and yields 8.71% annually.
The actively-managed Leatherback Long/Short Alternative Yield ETF is an actively managed fund that seeks income generation and capital appreciation through shareholder yielding equities and income producing securities. The expense ratio of the fund is 1.32% and annual yield is 3.36%.
Pacer Trendpilot Fund of Funds ETF (TRND - Free Report) – Beta: 0.49
The underlying Pacer Trendpilot Fund of Funds Index seeks to implement a systematic trend-following strategy that directs exposure to 100% to the Equity Component; or 50% to the Equity Component and 50% to 3-Month US Treasury bills; or 100% to 3-Month US Treasury bills, depending on the relative performance of the Equity Component and its 200-business day historical simple moving average. The fund charges 77 bps in fees and yields 1.59% annually.
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Time for Low-Beta ETFs?
Despite the Fed’s most aggressive tightening campaign in decades, the U.S. economy has displayed remarkable resilience, characterized by a robust labor market and strong consumer spending. Inflation too has steadily decreased since reaching its highest point in June 2022.
But then, the market lost momentum in the second half of this year due to sticky inflation which led to apprehensions of higher-for-longer interest rates. After posting its best first eight months of the year since 2003, the tech-heavy Nasdaq index struggled in the past few days due to rising rate worries (read: Fed Warns of More Rate Hikes to Tame Inflation: ETFs to Buy).
Erosion of Consumer Savings
One significant factor contributing to the likely stock market volatility is the weakening consumer. JPMorgan's Kolanovic highlights that consumers have utilized their excess savings from the pandemic, as quoted on Business Insider, published on Yahoo.
This economic tailwind has now dissipated, potentially leading to a further softening of consumer spending. With student loan payments set to restart in October, there's an added concern about reduced consumer disposable income.
Reduced Stock Buybacks and Valuations
Stock buyback programs, a tool often used by companies to support stock prices, are facing challenges. Overvaluations and the new buyback tax now make buybacks less attractive for companies especially when those are financed by debt (read: 6 Reasons Why Stocks Could Remain Subdued: ETFs to Gain).
Global Economic Concerns
One of the biggest concerns for investors lately is China's economic slowdown. While several market experts opine that China may surprise to the upside as pessimism appears overdone, worries regarding China’s economic health are still present. iShares MSCI China ETF (MCHI - Free Report) is off 1.6% past week (read: China ETFs in Better Shape on Property Support: Can the Rally Last?).
Low-Beta ETFs: A Safe Short-Term Choice?
Against this backdrop, we highlight a few low-beta ETFs for investors that could be played until no sturdy market rally is ensured. Low or negative beta products demonstrate higher degrees of stability in comparison to their market-responsive counterparts.
Understanding Beta
Beta measures the volatility or risk of a particular asset compared to the market. In other words, beta measures the extent of a security’s price movement relative to the market. In this article, we are considering the S&P 500 as the market.
If a stock has a beta of 1, then the price of the stock will move with the market. So, the stock is more volatile than the market if its beta is more than 1. In the same way, the stock is not as volatile as the market if its beta is less than 1.
For example, if the market offers a return of 20%, a stock with a beta of 3 will return 60%, which is overwhelming. Similarly, when the market slips 20%, the stock will sink 60%, which is devastating.
ETFs in Focus
Amplify BlackSwan Growth & Treasury Core ETF (SWAN - Free Report) – Beta: 0.49
The underlying S-Network BlackSwan Core Total Return Index seeks uncapped exposure to the S&P 500, while buffering against the possibility of significant losses. The fund charges 49 bps in fees and yields 3% annually.
Changebridge Long/Short Equity ETF (CBLS - Free Report) – Beta: 0.49
The actively-managed Changebridge Long/Short Equity ETF seeks long-term capital appreciation while minimizing volatility. The expense ratio of the fund is 1.70%.
FlexShares High Yield Value-Scored Bond ETF (HYGV - Free Report) – Beta: 0.49
The underlying Northern Trust High Yield Value-Scored US Corporate Bond Index measures the performance of a diversified universe of high yield, US-dollar denominated bonds of companies exhibiting favorable fundamental qualities, market valuations and liquidity. The fund charges 39 bps in fees and yields 8.71% annually.
Leatherback Long/Short Alternative Yield ETF (LBAY - Free Report) – Beta: 0.49
The actively-managed Leatherback Long/Short Alternative Yield ETF is an actively managed fund that seeks income generation and capital appreciation through shareholder yielding equities and income producing securities. The expense ratio of the fund is 1.32% and annual yield is 3.36%.
Pacer Trendpilot Fund of Funds ETF (TRND - Free Report) – Beta: 0.49
The underlying Pacer Trendpilot Fund of Funds Index seeks to implement a systematic trend-following strategy that directs exposure to 100% to the Equity Component; or 50% to the Equity Component and 50% to 3-Month US Treasury bills; or 100% to 3-Month US Treasury bills, depending on the relative performance of the Equity Component and its 200-business day historical simple moving average. The fund charges 77 bps in fees and yields 1.59% annually.