These are volatile times for U.S. stocks. On Wednesday, Oct. 24, the S&P 500 plunged, erasing its 2018 gains only to snap back and rally nearly 2% the following day. The benchmark U.S. equity index has been laboring below its 200-day moving average and is more than 8% below its 52-week high.
“The slide on Wednesday reflected worries among investors that a run of good news that had encouraged buying was coming to an end, replaced by concerns over rising interest rates and trade battles,” reports The New York Times.
Thursday’s ebullience could be short-lived because a pair of marquee companies disappointed on the earnings front, prompting shares to tumble in the after-hours session. Google parent Alphabet Inc (NASDAQ:GOOGL GOOG) and Amazon (NASDAQ:AMZN), two of the largest S&P 500 components, slid during Thursday’s after-hours session.
Even with the recent volatility, data suggest investors remain fond of exchange-traded funds (ETFs). In fact, some ETFs could prove ideally suited for the current environment. Here are some to mull over:
Utilities Select Sector SPDR (XLU)
Expense ratio: 0.13% per year, or $13 on a $10,000 investment.
When volatility spikes, the least volatile sectors often come into favor and that includes utilities. The Utilities Select Sector SPDR (NYSEARCA:XLU), the largest utilities ETF by assets, strutted its stuff Wednesday, surging more than 2% on heavy volume as other sector ETFs wilted. Some analysts are bullish on the usually defensive utilities sector.
In a note out Wednesday, CFRA Research Director of ETF & Mutual Fund Research Todd Rosenbluth said his firm upgraded its rating on the utilities sector to Overweight from Marketweight
Adding to the case for utilities ETFs, such as XLU, is the sector’s dividend yield of 3.4% and a price-earnings ratio of below 18, both of which compare favorably with the S&P 500.
Invesco S&P 500 ex-Rate Sensitive Low Volatility ETF (XRLV)
Expense ratio: 0.25% per year
Low volatility ETFs have a way of attracting investors when market turbulence escalates. That is understandable, but investors should heed the common advice surrounding these ETFs: Low volatility funds are designed to perform less poorly when stocks decline, not capture all of the upside of strong trending bull markets.
For the here and now, the Invesco S&P 500 ex-Rate Sensitive Low Volatility ETF (NYSEARCA:XRLV) is increasingly relevant because it addresses two issues currently confounding investors. XRLV follows the S&P 500 Low Volatility Rate Response Index.
“The Index is composed of the 100 constituents of S&P 500 Index that exhibit both low volatility and low interest rate risk,” according to Invesco. XRLV holds 100 stocks, a combined 41.62% of which hail from the financial services and technology sectors.
Legg Mason Low Volatility High Dividend ETF (LVHD)
Expense ratio: 0.27% per year
In addition to low volatility, dividends have been a winning theme during this month’s volatility. The combination of those two themes is benefiting ETFs such as the Legg Mason Low Volatility High Dividend ETF (NYSEARCA:LVHD).
“The common denominators among this list are low-volatility strategies and dividend plays,” said Morningstar in a recent note. “In other words, to varying degree, these ETFs are behaving as advertised for investors. And the top-performing ETF during the October swoon, Legg Mason Low Volatility High Dividend ETF (NASDAQ:LVHD), marries those two strategies.”
LVHD holds just 79 stocks, over 43% of which on a combined basis come from the utilities and consumer staples sectors. This month, the ETF is down 0.79%, far better than the 6.83% shed by the S&P 500.
iShares National Muni Bond ETF (MUB)
Expense ratio: 0.07% per year
Municipal bonds are often thought of as the territory of highly conservative investors, but establishing that type of view in the current environment may be just the thing to do. Plus, municipal bond ETFs lob off more income than traditional cash investments with less risk than corporate bonds.
The iShares National Muni Bond ETF (NYSEARCA:MUB) is the largest municipal bond ETF. MUB, home to $9.48 billion in assets under management, targets the S&P National AMT-Free Municipal Bond Index and holds over 3,400 municipal bonds. The 30-day SEC yield of 2.79% on MUB is significantly higher than what investors find on broad U.S. equity benchmarks.
Over 76% of MUB’s holdings are rated AAA or AA. The risk with municipal bond ETFs is that if the broader economy slows more rapidly than anticipated, some states could experience financial strain, potentially prompting a spate of new municipal issues at higher interest rates than the bonds in MUB and other muni ETFs.
WisdomTree Fundamental U.S. High Yield Corporate Bond Fund (WFHY)
Expense ratio: 0.38% per year
High-yield bond ETFs have been surprisingly sturdy amid three interest rate hikes by the Federal Reserve this year. Part of the reason for that may be a still benign default climate. The number of corporate defaults in 2018 (less than 20) is by no means alarmingly high, but that if that number dramatically spikes over the next several months, the WisdomTree Fundamental U.S. High Yield Corporate Bond Fund (CBOE:WFHY) is the ETF to consider.
WFHY’s underlying index is fundamentally weighted, a strategy that keeps the ETF’s credit quality on the higher end of the junk spectrum and its exposure to potential defaulters relatively low.
“In 2018, of the 19 companies (issuers) that have defaulted, the market cap weighted index held 16 of them accounting for 31 bonds (issues) in total,” according to WisdomTree. “These companies make up approximately 1.19% of the overall investable universe. This compares to a single issue and a single issuer in our fundamentally based approach constituting only 0.21% of the index.”
The ETF has a 30-day SEC yield of 5.34% and an effective duration of 4.07 years.
John Hancock Multifactor Consumer Staples ETF (JHMS)
Expense ratio: 0.50% per year
After slumping through much of the first three quarters of 2018, the consumer staples sector is showing some signs of life. Highlighting that point, the John Hancock Multifactor Consumer Staples ETF (NYSEARCA:JHMS) was one of just five ETFs to hit six-month highs on Oct. 25.
The multi-factor strategy employed by JHMS focuses on the following factors: smaller cap, lower relative price and higher profitability. Although JHMS tilts toward large-cap staples names, the weighted average market value of $83.76 billion of JHMS holdings is more than $20 billion below that of a widely followed consumer staples index.
This year, JHMS is showing there are advantages to multi-factor strategies at the sector level as the ETF’s 2018 loss is about 100 basis points less bad than S&P 500 Consumer Staples Index.
Vanguard Value ETF (VTV)
Expense ratio: 0.05% per year
Investors considering equity ETFs during this rocky October may find some comfort in the value factor, which is historically less volatile than growth and momentum. Regardless of where an investor is in life, be it a your investor or in retirement, the Vanguard Value ETF (NYSEARCA:VTV) is appealing on multiple fronts.
First, the value factor has been lagging growth and momentum for some time and with some of the wind coming out of those factors’ sails, it could be time for a value resurgence. Second, VTV is really cheap. As in cheaper than 95% of competing strategies.
As is the case with other traditional value ETFs, VTV is heavily allocated to the disappointing financial services sector. Financial stocks account for almost 24% of VTV’s roster, but that sector is heavily oversold, indicating VTV and other value ETFs could be credible near-term rebound candidates.
As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.
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