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Low Beta ETFs to Consider in an Uncertain Market

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The fast spreading coronavirus has sent the world stock market into a tailspin, eventually leading to bloodbath. This is especially true as the deadly virus has sparked concerns about its long-term economic impact on trade, ports, supply chains and consumer confidence. In particular, a growing number of companies have warned that the epidemic will prevent them from meeting sales or profit targets for the first three months of the year.

Per International Monetary Fund, the outbreak could reduce global economic growth by 0.1% this year. Goldman now projects that the U.S. economy will grow just 1.2% in the first quarter, down from 2.1% in the fourth quarter and 2.3% in full-year 2019. Meanwhile, the Organization for Economic Cooperation and Development warned that global growth could be cut in half if the outbreak continues to spread.

In order to insulate the economy from the epidemic, the Federal Reserve cut interest rates by half-percentage point to the range of 1.00-1.25%. This represents the first emergency rate cut and the biggest one-time cut since 2008. However, the move failed to reassure markets as the news was perhaps a sign that the Fed is concerned about the economy (read: 3 Safe ETFs for Volatile Markets).

Against such a backdrop, investors seeking to remain invested in the equity world could consider low beta ETFs.

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 markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus lag their peers (read: Last Week Saw 1st ETF Outflow in 2020: Winners & Losers).

Though utilities, real estate and consumer staples sector are low beta sectors, we have highlighted ETFs that offer broad exposure across various sectors and have AUM of more than $50 million, indicating good tradability. Here are six funds that could be intriguing options for investors amid bouts of volatility.

First Trust Dorsey Wright Momentum & Low Volatility ETF (DVOL - Free Report) – Beta: 0.55

This ETF tracks the Dorsey Wright Momentum Plus Low Volatility Index, which measures the performance of 50 stocks within the NASDAQ US Large Mid Cap Index that exhibit the lowest levels of volatility while maintaining high levels of relative strength. Financials and utilities are the top two sectors with 44.2% and 39.5% share, respectively. The fund has AUM of $109.1 million and charges 60 basis points (bps) in annual fees. Average trading volume is good at 76,000 shares (read: 5 Top-Ranked Sector ETFs to Buy at Bargain Price).

Global X SuperDividend U.S. ETF (DIV - Free Report) – Beta: 0.59

This fund provides exposure to 50 highest-dividend-yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. It is well spread across various segments with MLPs, consumer staples, mortgage REITs, communication services, industrials and utilities accounting for double-digit exposure each. The product has amassed $550.5 million in its asset base while trading in moderate volume of about 185,000 shares. It charges 46 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) – Beta: 0.60

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. Utilities, real estate and financials make up for the top three sectors with a double-digit allocation each. The fund has amassed $12.3 billion in its asset base and trades in heavy volume of nearly 4.1 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 (read: Low Volatility & Quality ETFs Stay Strong Amid Market Rally).

First Trust Horizon Managed Volatility Domestic ETF (HUSV - Free Report) – Beta: 0.62

HUSV is an actively managed ETF providing exposure to 126 domestic stocks that seem to exhibit low future expected volatility. Utilities, consumer cyclicals, healthcare and technology are the top four sectors accounting for a double-digit allocation each. It has amassed $267.8 million in its asset base but sees lower average daily volume of 51,000 shares. Expense ratio comes in at 0.70%.

Legg Mason Low Volatility High Dividend ETF (LVHD - Free Report) – Beta: 0.63

This fund provides exposure to 80 U.S. companies with a relatively high yield, low price and earnings volatility by tracking the QS Low Volatility High Dividend Index. Utilities dominates the fund’s portfolio with 27.7% share while real estate and consumer staples round off the next two spots. The ETF has $832.6 million in AUM and trades in moderate volume of 140,000 shares. It charges 27 bps in fees and 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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