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Nervous Investors Pile Into Low Volatility, Defensive ETFs
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Lately, the U.S. stock market has been caught in a vicious circle of trading as higher interest rates, collapse in oil prices, concerns over trade war and its resultant threats on the global economy unnerved investors. Additionally, the strong profit growth era seems to be coming to an end with most analysts expecting an earnings decline next year due to tariffs, fading impact of the tax cuts and higher borrowing costs (read: Are We Headed Toward Bear Market? ETFs to Save Your Portfolio).
Amid such a scenario, investors are piling into low volatility ETFs. This is because these products have the potential to outpace the broader market in bearish conditions or in an uncertain environment providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these are allocated primarily to defensive sectors that usually have a higher distribution yield than the broader markets.
Defensive sectors like utilities and healthcare are also seeing some capital inflows. In particular, the utilities sector is making the most of the prevailing uncertainty. Being the low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil (read: 3 Sector ETFs & Stocks That Survived October Upheaval).
Healthcare, which generally outperforms during periods of low growth and high uncertainty, also garnered investors’ interest due its non-cyclical nature.
Given this, we have highlighted few ETFs from these zones that saw solid inflows since Nov 12.
With AUM of $8.6 billion, XLU has attracted nearly $1 billion in its asset base since Nov 12, per etf.com. It provides exposure to a small basket of 29 securities by tracking the Utilities Select Sector Index. The fund is heavily concentrated on the top firm while other firms hold no more than 8.6% share. Electric utilities take the top spot in terms of sectors at 61.9%, closely followed by multi utilities (327%). The product charges 13 basis points (bps) in annual fees and sees a heavy volume of around 17.2 million shares on average. XLU has gained 0.6% since Nov 12 and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
This fund has gathered $503 million in its asset base, propelling AUM to $18.1 billion. It offers exposure to 205 U.S. stocks having lower volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. It is well spread across a number of securities with none holding more than 1.62% of assets. In terms of sectors, information technology, health care and consumer staples take the top three spots with a double-digit allocation each. The product charges 0.15% in expense ratio and trades in solid average daily volume of 2.1 million shares. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: Can Low Volatility ETFs Protect Your Portfolio?).
First Trust Health Care AlphaDEX Fund (FXH - Free Report)
This fund has gathered about $570.4 million in capital, bringing its total AUM to $2.2 billion. It follows an AlphaDEX methodology and ranks stocks in the space on various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 77 stocks with each holding less than 2.5% share. Health care equipment is the top sector with 40.6% allocation followed by healthcare providers & services (29.7%), and biotech (13.7%). This fund trades in volume of around 265,000 shares and charges 62 bps in annual fees. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
This ETF provides exposure to stocks with the lowest realized volatility over the past 12 months and has pulled in $151.4 million in capital. It tracks the S&P 500 Low Volatility Index and holds 105 securities in its basket with none accounting for more than 1.3% of assets. Utilities, real estate and financials make up the top three sectors with a double-digit allocation each. The fund has amassed $8.1 billion in its asset base and trades in heavy volume of nearly 2.1 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
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Nervous Investors Pile Into Low Volatility, Defensive ETFs
Lately, the U.S. stock market has been caught in a vicious circle of trading as higher interest rates, collapse in oil prices, concerns over trade war and its resultant threats on the global economy unnerved investors. Additionally, the strong profit growth era seems to be coming to an end with most analysts expecting an earnings decline next year due to tariffs, fading impact of the tax cuts and higher borrowing costs (read: Are We Headed Toward Bear Market? ETFs to Save Your Portfolio).
Amid such a scenario, investors are piling into low volatility ETFs. This is because these products have the potential to outpace the broader market in bearish conditions or in an uncertain environment providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these are allocated primarily to defensive sectors that usually have a higher distribution yield than the broader markets.
Defensive sectors like utilities and healthcare are also seeing some capital inflows. In particular, the utilities sector is making the most of the prevailing uncertainty. Being the low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil (read: 3 Sector ETFs & Stocks That Survived October Upheaval).
Healthcare, which generally outperforms during periods of low growth and high uncertainty, also garnered investors’ interest due its non-cyclical nature.
Given this, we have highlighted few ETFs from these zones that saw solid inflows since Nov 12.
Utilities Select Sector SPDR (XLU - Free Report)
With AUM of $8.6 billion, XLU has attracted nearly $1 billion in its asset base since Nov 12, per etf.com. It provides exposure to a small basket of 29 securities by tracking the Utilities Select Sector Index. The fund is heavily concentrated on the top firm while other firms hold no more than 8.6% share. Electric utilities take the top spot in terms of sectors at 61.9%, closely followed by multi utilities (327%). The product charges 13 basis points (bps) in annual fees and sees a heavy volume of around 17.2 million shares on average. XLU has gained 0.6% since Nov 12 and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.
iShares Edge MSCI Min Vol USA ETF (USMV - Free Report)
This fund has gathered $503 million in its asset base, propelling AUM to $18.1 billion. It offers exposure to 205 U.S. stocks having lower volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. It is well spread across a number of securities with none holding more than 1.62% of assets. In terms of sectors, information technology, health care and consumer staples take the top three spots with a double-digit allocation each. The product charges 0.15% in expense ratio and trades in solid average daily volume of 2.1 million shares. It has a Zacks ETF Rank #3 with a Medium risk outlook (read: Can Low Volatility ETFs Protect Your Portfolio?).
First Trust Health Care AlphaDEX Fund (FXH - Free Report)
This fund has gathered about $570.4 million in capital, bringing its total AUM to $2.2 billion. It follows an AlphaDEX methodology and ranks stocks in the space on various growth and value factors, eliminating the bottom-ranked 25% of the stocks. This approach results in a basket of 77 stocks with each holding less than 2.5% share. Health care equipment is the top sector with 40.6% allocation followed by healthcare providers & services (29.7%), and biotech (13.7%). This fund trades in volume of around 265,000 shares and charges 62 bps in annual fees. It has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.
Invesco S&P 500 Low Volatility ETF (SPLV - Free Report)
This ETF provides exposure to stocks with the lowest realized volatility over the past 12 months and has pulled in $151.4 million in capital. It tracks the S&P 500 Low Volatility Index and holds 105 securities in its basket with none accounting for more than 1.3% of assets. Utilities, real estate and financials make up the top three sectors with a double-digit allocation each. The fund has amassed $8.1 billion in its asset base and trades in heavy volume of nearly 2.1 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook.
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Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>