Global stocks went into a tailspin on Wednesday, with U.S. stocks witnessing the worst day of the year thanks to the uncertainty over Trump-induced optimism. With controversies doing rounds over the leakage of "highly classified information" to two top Russian officials by Trump, chances of his success in pushing through his pro-growth pledges are ebbing.
As per reports, Trump asked the former FBI chief James Comey to discontinue an investigation about the former National Security Adviser Michael Flynn's ties with Russia. This piece of information was enough to unsettle investors’ nerves as Democrats – the opposition – now demand impeachment of President Donald Trump.
As a result, global equities had a bloodbath with the S&P 500-based ETF SPDR S&P 500 ETF Trust SPY, SPDR Dow Jones Industrial Average ETF Trust DIA and PowerShares QQQ Trust QQQ losing about 1.8%, 1.7% and 2.5%, respectively, on May 17, 2017. Another reason that has possibly triggered this acute sell-off is the fact that U.S. stocks have been accused of overvaluation in recent times by many analysts.
Emerging market ETF iShares MSCI Emerging Markets ETF EEM lost about 1.7% on May 17, Vanguard FTSE Europe ETF VGK dropped about 1.4% and all-world ETF iShares MSCI ACWI ETF ACWI shed about 1.5% on the day. U.S. dollar plunged to lowest level since November. The yield on the 10-year benchmark U.S. Treasury nosedived to 2.22% on May 17 from 2.33% recorded the earlier day.
Against this backdrop, the investing world may be at a loss of ideas on where to park money for smart gains. For them, below we detail possible asset class movements and the likely smart ETF bets, if Trump trade wavers over the coming days.
Stir Toward Safe-Haven Bets
As risk-on trade subsides, the common investing practice is to turn to safe-haven trades. Dimming prospects of a sooner-than-expected Fed rate hike (thanks to some downbeat economic indicators released lately) and political concerns may lead safe-haven asset U.S. Treasury valuation and the related ETF iShares 20+ Year Treasury Bond ETF TLT to soar.
Gold is often viewed as a safe haven asset to protect against financial risks, and may perform well on heightened market volatility. Since the metal’s pricing is normally inversely related to the greenback, SPDR Gold Trust ETF GLD may get a fresh lease of life (read: Follow Gundlach's Insight with These ETFs).
Safe currency ETFs like CurrencySharesÂ Japanese Yen ETF FXY can also be decent plays at this moment (read: Safe Haven ETFs to Evade Geopolitics & Weak Economic Data).
Safe Sectors Will Likely Sizzle Too
Investors should note that amid Wednesday’s bloodbath, utility ETFs like Utilities Select Sector SPDR Fund XLU (up about 0.3%) and REIT ETFs like Vanguard REIT ETF VNQ (up 0.4%) were actually in the green. These sectors are high yielding and perform better in a low rate environment. So, these could prove to good buys if the market is gripped by Trump uncertainty.
Agreed, the ripple effects of uncertainty in the U.S. market will not leave foreign securities to stay in peace, but one should not forget that several international economies are looking up lately. Europe and the emerging markets are on a tear in fact on a pickup in economic activity and better valuations (read: Do Europe ETFs Have More Upside?).
So, ETFs like ProShares MSCI Europe Dividend Growers ETF EUDV and WisdomTree Emerging Markets Quality Dividend Growth Fund DGRE could be decent bets.
Drive for Dividends
High dividend ETFs may also be helpful in this perspective as higher current income can make up for capital losses to some extent. U.S.-based dividend ETFs including Vanguard High Dividend Yield ETF VYM and PowerShares S&P 500 High Dividend Low Volatility ETF SPHD could be useful for investors in waiting out the volatility via current income (read: 2 Excellent Dividend Growth ETFs in Focus).
Get Ready for Low Volatility & Defensive ETFs
If volatility levels crop up, investors can deal with this in various ways. First comes low volatility U.S. ETFs like SPDR S&P Low Volatility ETF SPLV, which shed only 0.4% on May 17 compared with a steep falloff in regular market-cap weighted funds. Investors can try funds like Legg Mason Emerging Markets Low Volatility High Dividend ETF LVHE and iShares MSCI Europe Minimum Volatility ETF .
The second way to fight volatility is with defensive ETFs like U.S Market Neutral Anti-Beta Fund BTAL and AdvisorShares Active Bear ETF HDGE, and last but not the least in queue are volatility ETFs themselves such as C-Tracks on Citi Volatility Index ETN CVOL andProShares VIX Short-Term Futures VIXY. Notably, as the name suggests, volatility products are quite rowdy in nature and thus suit investors with a short-term notion.
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