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Should You Diversify Your ETF Portfolio Amid Rising Uncertainty?

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Concerns over rate hike timing, inconsistent movement in oil prices and the Presidential election in November have resulted in increasing uncertainties, translating into a 10.2% jump in the fear-gauge CBOE Volatility Index (VIX) over the past five trading sessions. The index was up 4.5% in the trailing one-month. ETFs having diversified exposure to both equities and fixed income securities are poised to remain in focus in the current scenario.

Factors Behind Increasing Uncertainty

Investors have been cautious over the past few days ahead of Fed Chair Janet Yellen’s speech in Jackson Hole, WY on Friday. Though comments from some of the Fed officials indicate a sooner-than-expected rate hike, the rate hike path still remains unclear. Though the market believes that a September hike is unlikely, investors’ anticipation of a hike by the end of this year is gradually increasing (read: Treasury Bond ETFs in Focus on Rising Rate Hike Prospects).

Meanwhile, uncertain movement in oil price has also added to the concerns. Renewed hopes of a production freeze recently boosted oil prices. It is speculated that OPEC members and non-OPEC major oil producers including Russia may informally meet at the International Energy Forum in Algeria in late September to work out crude production control. However, any agreement between major oil producing nations to freeze crude production is "highly unlikely." As per the Morgan Stanley (MS - Free Report) report, OPEC believes that the market will heal the imbalances in oil price automatically. This led to inconsistent movement in oil prices (read: Crude Output Control Speculation Resurfaces: 4 ETFs to Watch).

Separately, the upcoming Presidential election in November is also expected to inject some uncertainty in the markets. Strategists at Bank of America’s (BAC - Free Report) investment banking arm Bank of America Merrill Lynch think that chances of a near term correction are fairly high. According to a client report released on Tuesday, these strategists identified nearly 10 factors which could lead to such an outcome. Prominent among them was uncertainty over the outcome of the election.

Diversified Portfolio ETFs in Focus

A well diversified portfolio may protect one’s returns from rising uncertainties in markets. Research has shown that in the long term, the performance of an investment portfolio depends mostly on asset allocation.  Further, according to modern portfolio theory, investors should invest in different asset classes that have low correlations with one another so as to achieve optimal risk-adjusted returns (read: Multi-Asset ETFs: The Bets of the Hour?).

A potential way to diversify one’s portfolio is choosing ETFs that maintain a diversified portfolio by investing in both equity as well as fixed income securities. Hence, we have highlighted four diversified portfolio ETFs that are likely to remain in focus in the coming days (see all Total Portfolio ETFs here).

iShares Core Growth Allocation (AOR - Free Report)

This fund tracks the S&P Target Risk Growth Index by maintaining a portfolio of both equity and fixed income securities. While it has 61.9% of its assets allocated to equity securities, 38% of its assets are invested in fixed income securities. The fund has $765.2 million AUM and an impressive daily average volume of more than 95,000 shares. AOR charges 22 bps in annual fees, significantly lower than the category average of 93 bps. The fund has gained 1.5% and 3.3% over the past one-month and three-month periods, respectively.

iShares Morningstar Multi-Asset Income (IYLD - Free Report)

This fund seeks to follow the performance of the Morningstar Multi-Asset High Income Index. Among the asset classes, corporate debt takes the top spot at nearly 51% while common equity (30%) and preferred equity (9%) hold the next two positions.The fund has $255.3 million AUM and a daily average volume of around 37,000 shares. IYLD charges 60 bps in annual fees, lower than the category average of 93 bps. The fund has gained 1.2% and 3.9% over the past one-month and three-month periods, respectively.

SPDR SSgA Income Allocation ETF (INKM - Free Report)

This fund maintainsa portfolio of both equity and fixed income securities. Asset class-wise, investment grade bonds occupy the top spot at 32% with Equity (28.8%), global real estate (15.2%) and high yield (12%) round-off the next three positions. The fund has $108.7 million AUM and a light daily average volume of about 6,000 shares. INKM charges 70 bps in annual fees, also lower than the category average of 93 bps. The fund has gained 0.4% and 4.1% over the past one-month and three-month periods, respectively. 

International MA Divers Inc ETF

This fund seeks to follow the performance of the NASDAQ International Multi-Asset Diversified Income Index. Among the asset classes, dividend paying equities takes the top spot at nearly 21.5% closely followed by fixed income ETFs (20.4%), REITs (20.2%) and preferred securities (19.2%).The fund has $13.1 million AUM and a light daily average volume of around 5,000 shares. YDIV charges 78 bps in annual fees, lower than the category average of 93 bps. The fund has gained 2.8% and 5.1% over the past one-month and three-month periods, respectively.

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