Volatility and uncertainty have shaken complacency from the stock market. A myriad of woes including the North Korea nuclear threat, Washington turmoil, doubts over Trump administration, uncertain Fed policy as well as Hurricane Harvey and its aftermath are currently acting as tailwinds.
Notably, North Korea tensions have been high as Trump threatened to slap a trade embargo on countries that do business with it. If this comes into effect, the result would be a trade war with China, causing massive turmoil in the U.S. economy which would have global repercussions. Further, warnings about Hurricane Irma barreling toward Puerto Rico and Florida also added to this week’s woes (read: ETFs to Lose If Trump Bans Trade With North Korean Partners).
If these weren’t enough, September is historically the worst month of the year for the stock market.
However, the news of the U.S. debt ceiling brought some relief. President Donald Trump has reached an agreement with Democratic congressional leaders for an extension of the debt limit until Dec 15.
Amid the uncertainties, investors are seeking exposure to the alternative sources of income rather than equity and bonds. For these investors, an allocation to low beta funds could be the safest, for as long as the disorder lingers.
Why Low Beta?
Beta measures the price volatility of stocks or funds 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 ETFs exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market is crumbling. Though these have lesser risks and lower returns, the funds 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: 6 ETF Picks for September).
Given the huge levels of volatility in the market, investors could find the following ETFs intriguing options until the market track clears.
PowerShares Financial Preferred Portfolio PGF: Beta - 0.10
This fund tracks the Wells Fargo Hybrid and Preferred Securities Financial Index, which measures the performance of preferred securities traded in the U.S. market by financial institutions. It holds 92 securities in its basket with a slight tilt toward the top firm at 7.1% while other firms hold less than 3.3% share. The ETF has amassed $1.7 billion and trades in average volume of 286,000 shares per day. It charges 63 bps in annual fees and has added 0.3% in a month (see: all the Preferred Stock ETFs here).
Reaves Utilities ETF UTES: Beta – 0.19
This is the only actively managed ETF that seeks to provide returns through a combination of capital appreciation and income, primarily through investments in utilities stocks. It holds 24 stocks with heavy concentration on the top firm at 13.5% while the other firms hold no more than 8.2% of assets. UTES has AUM of $15.5 million and average daily volume of 1,000 shares. It charges 95 bps in annual fees and has gained 2.4% in a month.
iShares Edge MSCI Multifactor Consumer Staples ETF CNSF: Beta – 0.28
This fund targets companies that have the potential to outperform the broad U.S. consumer staples sector and tracks the MSCI USA Consumer Staples Diversified Multiple-Factor Capped Index. Holding 28 stocks in its basket, it is guilty of concentration on the top firms. In terms of industrial exposure, about 60% of the portfolio is dominated by food beverage tobacco while food & staples retailing, and household and personal product take the remainder with a double-digit exposure each. This ETF debuted in the space 15 months ago and has attracted $2.5 million in its asset base. It trades in a meager volume of about 234 shares and charges 35 bps in fees per year. CNSF has lost 2.3% in the same time period and has a Zacks ETF Rank #2 (Buy).
Cambria Value and Momentum ETF VAMO: Beta – 0.31
This is an actively managed ETF providing exposure to a portfolio of companies that offer strong characteristics by focusing on all three factors — value, momentum, and tactical hedging — with the added benefit of lower volatility and protection from market downturns. It results in a basket of 101 securities with none holding more than 2.9% of assets. The fund has accumulated $9.4 million in its asset base while trades in average daily volume of 3,000 shares. Expense ratio comes in at 0.59%. VAMO is down 1.05% in a month’s time (read: ETF Investing Lessons from Warren Buffett).
Reality Shares DIVCON Dividend Guard ETF GARD: Beta – 0.36
This product seeks long-term capital appreciation by tracking the Reality Shares DIVCON Leaders Dividend Index. It invests in large-cap companies that are most likely to increase their dividend in the next 12 months based on their DIVCON scores. When the Guard Indicator forecasts a market downturn, the ETF dynamically reduces its long exposure to 50% while adding a 50% short position in the lowest-rated companies. This approach results in a basket of 50 stocks while charging 85 bps in annual fees. Industrials, consumer staples and information technology are the top three sectors. The long/short ETF has amassed $1.7 million in its asset base and shed 0.5% in a month.
Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability in the portfolio protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in a rocky market and some outperformance, especially if market uncertainty prevails in the coming months.
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ISHRS-EMS MCS (CNSF): ETF Research Reports
CAMBRIA-VAL&MOM (VAMO): ETF Research Reports
PWRSH-FIN PFD (PGF): ETF Research Reports
REALT-DVCN DVG (GARD): ETF Research Reports
REAVES UTIL ETF (UTES): ETF Research Reports
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