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Bet on Low-Beta ETFs as Trade Fears Escalate

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Though U.S. and Chinese officials are scheduled to meet today in Washington for a productive deal, tensions flared up as China threatened to retaliate if President Donald Trump puts into action his latest tariff threat. Trump is seeking to increase tariffs on Chinese goods worth $200 billion from 10% to 25%, and "shortly" impose another 25% tariff on further $325 billion of Chinese goods (read: U.S. Stocks See Worst Day in Months: Low-Risk ETFs in Focus).

Beijing’s warning came following the reports that the U.S. Trade Representative's office filed an official notice of new tariffs that would take effect at 12:01 a.m. on May 10 if no new trade deal is reached. The Trump administration wants an agreement that will stop China's unfair trade practices, including theft of U.S. intellectual property and trade secrets, forced technology transfers and currency manipulation. China denies those claims, but wants to maintain a good trade relationship with the United States.

The renewed tariff threat has resulted in market gyrations, making investors cautious in an improving economy. This is especially true as the latest bout of data indicates a strong economy, which bodes well for the stock market. The U.S. economy added jobs every month for 103 consecutive months, representing the longest-ever streak of job creation. The unemployment rate has dropped to 3.6% — the lowest in nearly 50 years — while wages rose at an annual rate of 3.2% in April, the ninth consecutive month of more than 3% growth (read: Solid US Labor Market Puts Focus on 3 Sector ETFs & Stocks).

Strong hiring and increasing wages will boost consumer spending and keep the economy on a solid growth path. The American economy expanded at a faster-than-expected rate of 3.2% in the first quarter of 2019, marking the best GDP growth to start the year since 2015. Americans are also feeling optimistic with consumer confidence rebounding back in April. Additionally, a surge in oil price and the Fed’s decision of not raising interest rates this year after seven hikes over the past two years also added to the strength.

Given this, investors may want to remain invested in the equity world, while at the same time seek protection from a downside. This could be easily achieved by investing in low-beta products.

Why Low Beta?

Beta measures the price volatility of stocks 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. Given lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when the markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus lag their peers.

With the help of our ETF Screener, we have highlighted five ETFs that could be intriguing options for investors amid bouts of volatility. All the funds offer exposure to a number of sectors and have AUM of more than $50 million, indicating their good tradability.

Global X SuperDividend U.S. ETF (DIV - Free Report) – Beta: 0.60

This fund provides exposure to 50 of the highest-dividend-yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It is widely diversified across each component as none of these holds more than 2.52% of the assets. Real estate accounts for one-fourth of the portfolio, closely followed by energy (15%), consumer non-cyclical (14%), and communications (12%). The product has amassed $453.6 million in its asset base while trading in moderate volume of about 107,000 shares. It charges 45 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 4 Dividend ETFs to Pick Amid Moderately Dovish Fed Minutes).

Horizons Nasdaq 100 Covered Call ETF (QYLD - Free Report) - Beta: 0.65

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 $527.9 million in AUM and trades in a good volume of around 197,000 shares a day on average. Expense ratio came in at 0.60%.

Legg Mason Low Volatility High Dividend ETF (LVHD - Free Report) – Beta: 0.66

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 78 stocks in its basket, LVHD is widely spread out across each component with none making up for more than 2.8% of assets. Utilities dominates the fund’s portfolio with 27.5% share while consumer staples, and real estate round off the next two spots. The ETF has $638.8 million in AUM and trades in moderate volume of 83,000 shares. It charges 27 bps in fees and has a Zacks ETF Rank #3.

Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) – Beta: 0.70

This ETF provides exposure to stocks with the lowest-realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index and holds 100 securities in its basket with each accounting for less 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 $10.4 billion in its asset base and trades in heavy volume of nearly 3.2 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 (read: Low-Volatility ETFs Trading at a 52-Week High).
First Trust Morningstar Dividend Leaders Index Fund (FDL - Free Report)

With AUM of $1.6 billion, the fund follows the Morningstar Dividend Leaders Index. In total, it holds 98 stocks that have shown the highest dividend consistency and dividend sustainability with each accounting for less than 10% of assets. Volume is solid as it exchanges nearly 230,000 shares a day on average while expense ratio comes in at 0.45%. FDL has a Zacks ETF Rank #3.

Bottom Line

Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability to the portfolio, protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in the current market environment and seeking outperformance.

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