The deadline on the so-called fiscal cliff is ticking down and leaders in Washington may not come to an agreement on the budget. Investors who want portfolio protection from this possible market scenario could consider bond and low-volatility ETFs.
“We also expect the U.S. economy will behave more like the Roadrunner than Wile E. Coyote by making a sharp U-turn before heading over the fiscal cliff. It is highly doubtful that all the tax hikes and spending cuts will be allowed to occur all at once, as significant bi-partisan support exists for the extension and renewal of many provisions,” Ingrid Hendershot wrote for Seeking Alpha. [ETFs to Track Market Sentiment]
The growing U.S. debt and chance of comprehensive tax reform with major spending cuts still looming to help close up the deficit gap will put more pressure upon the upcoming presidential election. Furthermore, Congress is unlikely to do much of anything until the “lame-duck” situation is cleared up.
However, giving up on stocks and ETFs would be a mistake as the S&P 500 did rally this year about 12% so far. Investors should consider economic fundamentals before making huge changes to investment strategies. [Muni Bond ETFs for Liquidity and Yield]
The following ETFs could help give portfolio protection in the event of a fiscal cliff:
- PowerShares S&P 500 Low-Volatility (SPLV) The concentration in stales and utilities puts this fund on good defense. The fund has about $2.3 billion in assets, which equals good liquidity. [Low Volatility ETF Demand Fueled by Desire for Safety]
- iShares S&P National Muni Bond ETF (MUB) Assets of $3.1 billion gives the fund credibility and the diversification benefits help reduce the risk of default. Average holdings of the holdings is about 6 years.
- iShares Barclays 20+ Year Treasury Bond ETF(TLT) The ETF has about $3.6 billion in assets and holds about 20 securities with an average maturity of 28 years. Currently,Treasury bond investments are yielding a negative real return.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.