Amid another flareup in the ongoing U.S./China trade dispute, market uncertainty is creeping higher. Earlier this week, the CBOE VIX Volatility Index, a widely followed gauge of investor uncertainty, spiked higher, prompting some analysts to speculate about a technical breakout.
While market turbulence and uncertainty may reside on the higher end of the spectrum over the near-term, taking advantage of that theme via volatility-related exchange-traded funds (ETFs) is not something every investor indulges in. Volatility-related products are not safe ETFs. Rather, those products are intended for aggressive, sophisticated traders.
Investors do not need to fret. There are plenty of funds that qualify as safe ETFs that help investors stay engage with equities while the U.S. and China workout their trade differences. Here are some ETFs to consider that could prove useful (and durable) over the near-term.
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD)
Expense Ratio: 0.30% per year, or $30 annually per $10,000 invested
For investors looking for a safe ETF that also includes a steady income stream, the Invesco S&P 500 High Dividend Low Volatility ETF (NYSEARCA:SPHD) is an idea to consider. The $3.21 billion SPHD currently yields 4%, or more than double the dividend yield on the S&P 500. SPHD’s 50 holdings are the S&P 500 members with the highest dividend yields and the lowest trailing 12-month volatility, making the fund suitable for investors looking to skirt market turbulence.
Because SPHD identifies stocks by dividend and volatility traits, this safe ETF’s sector bets are not surprising. Currently, the Invesco fund devotes almost 38% of its combined weight to the real estate and utility sectors, groups known for above-average yields and below-average volatility.
While SPHD is lagging the S&P 500 this year, the fund has held up somewhat better than the broader market since trade tensions sparked increased volatility last week. SPHD resides about 3.70% below its all-time high. For investors looking to make a long-term bet on a safe ETF, SPHD also makes sense because the fund pays a monthly dividend.
iShares Edge MSCI Min Vol USA ETF (USMV)
Expense Ratio: 0.15%
As the largest low volatility ETF, the iShares Edge MSCI Min Vol USA ETF (CBOE:USMV) is bound to draw increased attention when headline risk rises and that has been the case in recent days as USMV is one of the top asset gatherers among U.S.-listed ETFs since the end of April.
Minimum volatility “strategies aim to create a holistic portfolio with lower risk than the market,” according to BlackRock. “The factor has historically delivered lower downside capture, but lower upside potential as well, making it more appropriate for investors seeking to reduce risk while still maintaining potential for returns similar to the broader market.”
USMV is a safe ETF, relatively speaking, but that does not make it a risk-free bet. Only about 44% of the ETF’s sector allocations can be considered defensive and many of the fund’s marquee holdings are large-cap multi-nationals that could be pinched by an ongoing trade spat with China, related tariffs or a subsequent rally by the U.S. dollar.
iShares Core S&P Small-Cap ETF (IJR)
Expense Ratio: 0.07%
Small-cap stocks are usually more volatile than larger companies, so the current market environment may not appear conducive to embracing small-cap equities and ETFs such as the iShares Core S&P Small-Cap ETF (NYSEARCA:IJR). Upon further examination, IJR may indeed qualify as a safe ETF at the moment.
Small caps typically generate the bulk of their revenue within the U.S., insulating them from trade wars. That is one advantage. Another advantage is that by virtue of that domestic focus, small caps are not pinched by a stronger U.S. dollar as are large-cap, multi-national companies. Amid geopolitical risk, global investors often bid the safe-haven dollar higher. That is often a drag on riskier assets, but a scenario small caps often meet with aplomb.
At the sector level, IJR, which tracks the S&P SmallCap 600 Index, cements its domestic focus by allocating approximately half its weight to industrial, financial services and consumer discretionary names. In small-cap territory, those sectors are usually focused on the U.S. economy and do not have export-driven business models.
Invesco S&P SmallCap Financials ETF (PSCF)
Expense Ratio: 0.29%
A small-cap sector fund rarely screams “safe ETF,” but considering the lack of international exposure of small-caps and the same being true of the financial services sector, the Invesco S&P SmallCap Financials ETF (NASDAQ:PSCF) could prove to be a safe ETF.
Consider this: over the past week, PSCF is down 0.40% while the large-cap S&P 500 is lower by 1.47% over the same period. Additionally, more than 37% of PSCF’s 135 holdings are classified as value stocks, more than triple the number of names in the fund that are classified as growth stocks. As a result, PSCF trades at compelling multiples relative to broader small-cap benchmarks, such as the S&P SmallCap 600 and the Russell 2000.
Over the near-term, PSCF could prove to be a tactical, safe ETF play for slightly aggressive investors. PSCF has recently seen modest outflows, but that situation could rapidly reverse if the fund continues proving sturdy against large-cap plays.
ProShares S&P 500 Dividend Aristocrats ETF (NOBL)
Expense Ratio: 0.35%
The ProShares S&P 500 Dividend Aristocrats ETF (CBOE:NOBL) is the second dividend fund on this list of safe ETFs and this dividend growth play merits plenty of consideration in this conversation. Recent and long-running history confirm that NOBL and its underlying index, the S&P 500 Dividend Aristocrats Index, are usually less volatile than broader equity indexes.
Confirming NOBL’s status as a safe ETF, the fund has a penchant for performing less poorly than the S&P 500 when the broader market slumps. NOBL did just that last year and its underlying index has even notched a few positive annual performances in years in which the S&P 500 finished lower.
NOBL has a dividend yield that is nearly 30 basis points higher than the S&P 500’s plus a quality tilt by virtue of its dividend growth emphasis make this a premier safe ETF idea for the current market environment.
Todd Shriber owns shares of SPHD.
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