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6 Defensive ETFs to Beat an Edgy Market in August

Sanghamitra Saha

Renewed U.S.-China trade tensions, China’s yuan devaluation and a barrage of central bank rate cuts point to global economic slowdown and a possible recession in the near term. Bond king Jeffrey Gundlach, who oversees $140-billion DoubleLine Capital, believes that there is 75% probability of a recession in the U.S. economy before the election in 2020. A steep yield curve inversion made him feel so.

Though dovish Fed comments and actions boosted the stock market last month, August so far has been rough. The S&P 500 is down 2% in the past five days (as of Aug 7, 2019) due to fresh Trump tariffs on Chinese goods and China’s retaliation in the form of yuan devaluation. Global market fund iShares MSCI ACWI ETF ACWI also lost 2% in the past five days. (read: After Yuan Devaluation, Likely Chinese Retaliation & ETF Ways).

Trump announced that he will levy 10% tariff on $300 billion in Chinese imports that aren’t yet subject to U.S. duties. The new tariff will be levied starting Sep 1. Another $250 billion in Chinese goods are already subject to a 25% U.S. tariff. President Trump also indicated that the new round of tariffs could be increased beyond 25%.

Beijing has so far retaliated with tariffs on $110 billion of American goods, including agricultural products. But as a retaliatory move to the new round of tariffs, China devalued its currency to an 11-year low on Aug 5 and stopped purchases of U.S. farm products. Post China’s action, stocks staged its worst day of this year on Aug 5. Volatility in the market has risen as evident from the iPath Series B S&P 500 VIX Short-Term Futures ETN's VXX 8.8% increase in the past five days. (as of Aug 7, 2019) (read: 6 Sector ETFs in Tight Spot on Renewed Trade Tensions).

Against this backdrop, if you dread a near-term correction, the following ETFs might protect your portfolio.

AGFiQ US Market Neutral Anti-Beta Fund BTAL

Investors, who want to shift their focus to low-beta stocks in this uncertain market environment, can consider adding BTAL ETF to their portfolio. This fund follows the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index benchmark. The index identifies the lowest-beta stocks and goes long on them, while at the same time going short on the highest-beta stocks. The fund charges 76 bps in fees.

IQ Hedge Multi-Strategy Tracker ETF QAI

The underlying IQ Hedge Multi-Strategy Index seeks to replicate the risk-adjusted return characteristics of the collective hedge funds using various hedge fund investment styles, including long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets. The fund charges 79 bps in fees.

ProShares Large Cap Core Plus CSM

The underlying Credit Suisse 130/30 Large Cap Index is designed to replicate an investment strategy that establishes either long or short positions in certain of the 500 largest U.S. market cap equities by applying a rules-based ranking and weighting methodology. It charges 45 bps in fees.

ProShares Hedge Replication ETF HDG

The underlying Merrill Lynch Factor Model - Exchange Series is designed to reflect hedge fund industry performance through an equally weighted composite of over 2,000 constituent funds. In seeking to maintain a high correlation with the HFRI, the benchmark utilizes a systematic model to establish, each month, weighted long or short positions in six underlying factors. The fund charges 95 bps in fees.

IQ Hedge Market Neutral Tracker ETF QMN

The underlying IQ Hedge Market Neutral Index typically invests in both long and short positions in asset classes while minimizing exposure to systematic risk. These strategies seek to have a zero-beta exposure to one or more systematic risk factors including the overall market as represented by the S&P 500 Index, economic sectors or industries, market cap, region and country. Its expense ratio is 1.01%.

IQ Hedge Long/Short Tracker ETF QLS

The underlying IQ Hedge Long/Short Index seeks to replicate the collective hedge funds pursuing a long/short strategy. Its expense ratio is 1.04%.

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