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Fearing a Replay of December 2018? ETF Strategies to Try

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Global growth slowdown fears, thanks to U.S.-China trade tensions and Fed’s rate hike, shattered Wall Street in 2018 with the SPDR S&P 500 ETF SPY losing 9%, SPDR Dow Jones Industrial Average ETF (DIA - Free Report) shedding 8.9% and Invesco QQQ Trust (QQQ) retreating about 8.8%. The market saw the most awful December since the Great Depression.

The story this year is no different. Wall Street saw a dull start to December. QQQ has lost 1.8%, SPY retreated 1.5% and DIA is off 1.9% so far this December. Stock-market volatility rose with iPath Series B S&P 500 VIX Short-Term Futures ETN VXX gaining 5.9% on Dec 3. The benchmark 10-year Treasury yield dropped the maximum in four months with iShares 20+ Year Treasury Bond ETF TLT gaining 2.1% on Dec 3.

Anticipation of an initial level trade deal by Dec 15 had been lifting Wall Street to record highs so far in the fourth quarter. But President Trump’s comment “that he could wait until after the 2020 election for a trade deal with China” sent a shockwave through the markets this month. U.S. support for Hong Kong protesters made matters worse.

Added to this, the ISM manufacturing and U.S. construction spending data came in worse than expected. Consumer confidence data was also subdued. Investors’ focus is now on Dec 15 — the date for the imposition of another round of tariffs on Chinese goods.

Against this backdrop, investors might consider the below-mentioned ETF areas.

Dividend-Paying Companies

Dividend aristocrats have a history of raising dividend payouts each year. These high-quality companies provide hedge against economic uncertainty. The S&P 500 Dividend Aristocrat Index has historically outperformed the S&P 500 Index, with lower volatility over a longer period of time.

So, one can play funds like Proshares S&P 500 Dividend Aristocrats ETF NOBL and SPDR S&P Dividend ETF SDY (read: 3 Dividend Growth ETFs & Stocks to Counter Looming Volatility).

Investors should also note that the high-dividend yield can save investors even if there is any capital loss. So, one can bank on dividend-heavy stocks and ETFs. Vanguard High Dividend Yield ETF VYMiShares Core High Dividend ETF HDV and O'Shares FTSE US Quality Dividend ETF OUSA are all Buy-rated products.

Focus on Gold

Rising trade tensions and the safe-haven rally will likely lift prices of precious metals. Also, the Fed and several other global central banks are acting dovish. This may boost non-interest-bearing assets like gold. SPDR Gold Trust GLD could thus be played (read: Is it Time to Buy Gold ETFs?)

Consumer Staples Should Stand Out

Staples is the non-cyclical space of the broader consumer sector and should do well during turbulent times. This makes Consumer Staples Select Sector SPDR Fund XLP and Vanguard Consumer Staples Index Fund ETF Shares VDC good picks if volatility flares up. Wal-Mart’s almost 9% exposure to XLP makes it a good buy as this big-box retailer has been seeing outstanding sales this holiday season.

Bet Big on Quality & Low-Volatility ETFs

Quality and low-volatility ETFs are relatively safe and can help investors fight the looming economic slowdown. Quality stocks are rich in value characteristics, with a healthy balance sheet, high return on capital, elevated margins and solid earnings growth.

In this category,iShares Edge MSCI Min Vol U.S.A. ETF USMVSPDR MSCI USA StrategicFactors ETF QUS and iShares Edge MSCI U.S.A. Quality Factor ETF QUAL are good picks.

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