3 Low Risk Equity ETFs for An Uncertain Market

The fourth quarter has seen a shaky start on the bourses due to global growth worries, strong dollar and weak corporate earnings. This is especially true as the Dow Jones Industrial Average witnessed the steepest decline in more than two months while the S&P 500 dropped to an eight-week low. Meanwhile, volatility climbed to the highest level since March.

The latest round of global economic data including dull German industrial production, which raised worries on the health of the European economy, and lowered the global growth forecast from the International Monetary Fund (:IMF) resulted in a sharp sell-off of the stocks this week, compelling investors to move away from riskier investments like stocks.

The IMF reduced the global economic forecast from 3.4% to 3.3% for this year and from 4% to 3.8% for the next, citing persistent weakness in the Euro zone, Japan as well as key emerging and developing markets like China, Brazil, Russia and Middle East. Further, the agency warned about the risks of rising geopolitical tensions and a financial-market correction as stocks reach “frothy” levels (read: 4 Emerging Market ETFs to Consider for Q4).

The gloomy expectations for Q3 earnings have also taken a toll on the stock market rally. As per the Zacks Earnings Trends, earnings for the S&P 500 companies are expected to grow 1.5% on 1.8% higher revenues. Earnings estimates have fallen sharply over the past three months from 6.3% growth projected in late June. The weakness is broad-based with estimates of 14 out of 16 Zacks sectors witnessing negative revisions. Among the sectors, finance, energy, retail, auto and basic materials are the major culprits.

Moreover, the conflict in Ukraine, Iraq instability, a protest in Hong Kong and Ebola crisis in West Africa are also weighing on the stock market returns. Another reason for the recent market pullback has been the monetary policy. While the Fed will end its quantitative easing program this month, the timing of interest rate hike is still uncertain. However, the Fed retained its dovish stance in the latest Fed minutes by keeping interest rates at lower levels for a considerable period of time after its bond-buying program end.

Given sluggish macro fundamentals and uncertainty, the markets are expected to remain volatile in the coming days and investors should consider low risk products in order to protect themselves from huge losses. Below, we have highlighted three ETFs that investors could consider in their portfolios if the stock market continues to experience volatility. These funds appear to be safe in the current market turbulence, and tend to reduce risk while generating decent returns (read: 3 Sector ETFs to Avoid, and One to Watch for Gains):

iShares Core High Dividend ETF (HDV)

This ETF provides exposure to 75 dividend-paying U.S. stocks with relatively high dividend yield on a consistent basis. It tracks the Morningstar Dividend Yield Focus Index and is a large cap centric fund as 92% of total asset is allocated to this market cap level. The product is highly concentrated on the top 10 holdings at 58% of assets with the largest allocation to AT&T (T), Verizon (VZ) and Johnson & Johnson (JNJ).

The product is slightly tilted toward consumer goods at 22.3%, closely followed by healthcare (17.5%), communication services (16.5%) and utilities (11.6%). HDV is among the largest and most popular in the dividend space with AUM of about $4.4 billion while charging 12 bps in fees per year. It trades in good volume of more than 348,000 shares a day and sports a dividend yield of 3.15%.

The fund gained 8.4% in the year-to-date time frame and has a Zacks ETF Rank of 3 or ‘Hold’ rating with Medium risk outlook (read: 3 Unbeatable Dividend ETF All-Stars for Your Portfolio).

PowerShares S&P 500 Low Volatility Portfolio (SPLV)

This ETF provides exposure to 101 U.S. stocks with the lowest realized volatility over the past 12 months by tracking the S&P 500 Low Volatility Index. The fund is widely spread across number of securities as none of these holds more than 1.5% of assets.

However, the product is skewed toward financials at 23.5% while utilities (19.9%), consumer staples (15.7%) and industrials (12.9%) round off the top four. It is also focused on large cap stocks as these accounts for 75% of assets while mid caps account for the remainder with just 4% going to small caps.

SPLV is the largest and the most popular ETF in the low volatility space with AUM of $4.6 billion and average daily volume of around 832,000 shares. The fund charges 25 bps in annual fees and is up 6.6% so far this year. The fund has a Zacks ETF Rank of 3 with Medium risk outlook.

First Trust Low Beta Income ETF (FTLB)

This is an actively managed fund and does not track any index. The fund seeks to maximize total returns by investing in the U.S. large cap high dividend paying securities while utilizing an index option strategy simultaneously. The option strategy consists of buying U.S. exchange-traded put options on the S&P 500 Index and writing (selling) U.S. exchange-traded covered call options on the Index (see: all large cap ETFs here).

This strategy provides downside protection and reduces the fund’s sensitivity to declining markets. The approach results in a basket of 122 stocks with a higher combined 13.7% allocation to Altria Group (MO), Duke Energy (DUK) and Apple (AAPL). From a sector look, information technology, consumer staples, health care, and financials take the top four spots with double-digit allocation.

The fund is the latest addition in the ETF world and has accumulated $3 million in its asset base so far with average daily volume of 9,000 shares. The product has added 2.2% since its inception early in the year.

Bottom Line

These products have the potential to outperform the broad market, especially if market uncertainty continues to persist over the coming months.

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