The stock market bulls are playing hide and seek as the Dow Jones Industrial Average has been trading in wild swings this week. The blue-chip index fluctuated in a range of 1,600 and 1,200 on Monday and Tuesday, respectively, marking the two biggest intraday ranges in history. The index also swung in a range of more than 500 points on Wednesday, indicating heightened volatility (read: How to Hedge Volatility With ETFs).
Renewed concerns over faster-than-expected rates hike have shaken complacency off the stock market. The panic was created late last week after the January jobs data, which showed that wages increased at the fastest pace in more than eight years. The strong number has sparked fears of inflation that might force the Fed to adopt speedy rate hikes.
The Fed intends to increase interest rates three times this year but the rise in inflation could lead to four hikes. Higher-than-expected rise in interest rates would lead to a rise in borrowing cost, thereby dulling the appeal for equities. As a result, bond yields have risen sharply with 10-year yields climbing to 2.845% from 2.77% at the start of the month. Further, political turmoil and threats of overvaluation are also weighing on the bull market, which is drawing closer to its ninth anniversary.
However, the stock market is currently in a much better condition thanks to encouraging domestic and international fundamentals, better-than-expected corporate earnings and the new tax legislation. The massive $1.5-trillion tax cuts will create an economic surge, boosting job growth and earnings of corporates.
About halfway through the earnings season, the picture appears to be solid with all around strength and momentum. Not only is an above-average proportion of companies beating top and bottom-line expectations, but estimates for the current period are also materially going up, the per Earnings Trends (read: Markets Bounce Back: Still It Is Time for Quality ETFs?).
Investors seeking to remain invested in the equity world could consider low beta ETFs & stocks as long as the chaos prevails.
Why Low Beta?
Beta measures the price volatility of stocks or funds relative to the overall market. It has direct relationship to market movements. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market.
That said, low beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market is crumbling. Despite lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when markets soar, these low beta funds experience lesser gains than the broader market counterparts and thus, lag their peers.
Below we have highlighted five ETFs using our database that could be intriguing options for investors until the market track clears. These funds do not track a particular sector or industry but are instead exposed to broader market risk and reward.
PowerShares Financial Preferred Portfolio (PGF - Free Report) – Beta: 0.07
This fund tracks the Wells Fargo Hybrid and Preferred Securities Financial Index, which measures the performance of preferred securities traded in the U.S. market by financial institutions. It holds 86 securities in its basket and charges 63 bps in annual fees. The ETF has amassed $1.6 billion and trades in average volume of 308,000 shares per day. It charges 63 bps in annual fees and has lost 0.5% in a one-week timeframe (see: all the Preferred Stock ETFs here).
Legg Mason Low Volatility High Dividend ETF (LVHD - Free Report) – Beta: 0.52
This fund provides exposure to U.S. companies with a relatively high yield, low price and earnings volatility by tracking the QS Low Volatility High Dividend Index. Holding 86 stocks in its basket, LVHD has $498.8 million in AUM and trades in moderate volume of 61,000 shares. It charges 27 bps in fees and lost 4.6% over the past week.
Global X SuperDividend U.S. ETF (DIV - Free Report) – Beta: 0.57
This fund provides exposure to 51 of the highest dividend yielding equity securities in the United States by tracking the INDXX SuperDividend U.S. Low Volatility Index. It has amassed $400.7 million in its asset base while trades in moderate volume of about 78,000 shares. The ETF charges 45 bps in fees per year from investors and is down 3.5% in the same time frame.
Horizons NASDAQ-100 Covered Call ETF (QYLD - Free Report) - Beta: 0.59
This ETF follows the CBOE NASDAQ-100 BuyWrite V2 Index, which is designed to buy a NASDAQ-100 stock index portfolio, and writing (or selling) the near-term NASDAQ-100 Index covered call option, generally on the third Friday of each month. The product has $171.6 million in AUM and trades in a lower volume of under 47,000 shares a day on average. Expense ratio came in at 0.60%. QYLD has lost 2.7% (read: 5 Long/Short ETFs to Play in Market Crash).
Pacer Trendpilot US Large Cap ETF (PTLC - Free Report) – Beta: 0.60
This ETF follows the Pacer Trendpilot US Large Cap Index, which uses an objective, rules-based methodology to implement a systematic trend-following strategy that directs exposure 100% to the S&P 500 index, or 50% to the S&P 500 and 50% to 3-Month US Treasury bills, or 100% to 3-Month US Treasury bills, depending on the relative performance of the S&P 500 index & its 200-business day historical simple moving average. The fund has AUM of $808.5 million and charges 60 bps in annual fees. Average daily volume is good as it exchanges 130,000 shares in hand. PTLC has lost 5.1% over the past week.
Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability in the portfolio protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in a rocky market and some outperformance, especially if market uncertainty prevails in the coming months.
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