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ETF Dos & Don'ts if the Government Shuts Down

Sanghamitra Saha
DG vs. TJX: Which Stock Is the Better Value Option?

President Donald Trump’s recently issued warnings of shutting down the government in October if “funds are not secured to build a Mexico border wall”. As if, the political drama over the health care bill and incendiary comments over North Korea’s nuclear activity were not enough!

Congress is required to authorize a spending measure by September 30, to keep the government open. Lawmakers also need to increase the debt limit by the end of September, making the time frame crucial. 

Building a wall along the border of Mexico as part of his immigration strategy and making Mexico pay for it was Trump’s one of the key campaign promises.

As per Bloomberg, “Trump has made clear for months he wasn’t happy with the last bipartisan spending deal in May because it didn’t fund a new wall on the southern border……. At the time, he tweeted that a "good" government shutdown may be needed to force Democrats to make concessions.”

Needless to say, Trump’s latest warning weighed on the U.S. indexes. Volatility crept up with iPath S&P 500 VIX ST Futures ETN VXX (VXX) adding 0.8% on August 23. VXX was up over 2.9% after hours.

How Heavy Would the Impact be if Government Shuts Down?

According to the American Enterprise Institute, as quoted at CNBC.com, a government shutdown will not leave any material impact on the market or economy, though it will have political consequences. The source also quoted chief U.S. economist at JPMorgan, pointing out that the last government shutdown in 2013, went on for only 2.5 weeks and failed to have any huge impact on the economy.

Still, there could be some minimal movements in some specific asset classes. So, below we highlight a few ETF strategies which could prove to be gainful to investors.

Stay Away from Mexico

Since this particular border issue does not go well with Mexico, some panic-selling could punish Mexico ETFs at this moment. So, it’s better to stay away from iShares MSCI Mexico Capped EWW or Deutsche X-trackers MSCI Mexico Hedged Equity Fund DBMX. EWW lost about 0.3% on August 23.

Get Ready for Low Volatility & Defensive ETFs

If volatility levels crop up, investors can deal with this in various ways. First comes low volatility U.S. ETFs like Legg Mason Low Volatility High Dividend ETF LVHD. The second way to fight volatility is with defensive ETFs like U.S Market Neutral Anti-Beta Fund BTAL and AdvisorShares Active Bear ETF HDGE, and last but not the least in queue are volatility ETFs themselves such as C-Tracks on Citi Volatility Index ETN CVOL and ProShares VIX Short-Term Futures VIXY . Notably, as the name suggests, volatility products are quite rowdy in nature and thus suit investors with a short-term notion.

Flight to Safety

As risk-on trade subsides, the common investing practice will be to turn to safe-haven trades. Dimming prospects of a sooner-than-expected Fed rate hike (thanks to somber inflation) and political concerns may lead safe-haven asset U.S. Treasury valuation and the related ETF iShares 20+ Year Treasury Bond ETF TLT to soar.

Gold is often viewed as a safe haven to protect against financial risks, and may perform well on heightened market volatility. Since the metal’s pricing is normally inversely related to the greenback, SPDR Gold Trust ETF GLD may get a fresh lease of life. Safe currency ETFs like CurrencyShares Japanese Yen ETF FXY can also be decent plays at this moment (read: Trump Warning Put These ETFs in Focus).

Safe Sectors Will Likely Sizzle Too

Investors should note that amid market bloodbath, utility ETFslike Utilities Select Sector SPDR Fund XLU and REIT ETFs like Vanguard REIT ETF VNQ should actually be in the green. The funds already gained 0.3% and 1% on August 23, 2017. These sectors are high yielding and perform better in a low rate environment. So, these could prove to be good buys if the market is gripped by government shutdown.

Dump A Few Specific Sectors

If yields fall, financial ETFs likeFinancial Select Sector SPDR Fund XLF will likely retreat. A few cyclical sector ETFs like PowerShares S&P Small-Cap Consumer Discretionary ETF PSCD may also underperform.

Internationalize Your Portfolio

Agreed, the ripples of uncertainty in the U.S. market will keep foreign securities volatile, but one should not forget that several international economies are looking up lately. Europe and the emerging markets are on a tear in fact on a pickup in economic activity and better valuation (read: Bet on 4 Global ETFs to Earn at Least 4% Yield).

So, ETFs like ProShares MSCI Europe Dividend Growers ETF EUDV and WisdomTree Emerging Markets Quality Dividend Growth Fund DGRE could be decent bets.

Drive for Dividends

High dividend ETFs may also be helpful in this perspective as higher current income can make up for capital losses to some extent. U.S.-based dividend ETFs including Global X SuperDividend U.S. ETF DIV and SPDR S&P 500 High Dividend ETF SPYD or multi-asset ETFs like Principal EDGE Active Income ETF YLD could be useful for investors in waiting out the volatility via current income (read: Is it Time to Bet on These Multi-Asset ETFs?)

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ISHARS-20+YTB (TLT): ETF Research Reports
CRYSHS-JAP YEN (FXY): ETF Research Reports
GOLD (LONDON P (GLD): ETF Research Reports
PRO-VIX ST FUT (VIXY): ETF Research Reports
VIPERS-REIT (VNQ): ETF Research Reports
SPDR-FINL SELS (XLF): ETF Research Reports
IPATH-SP5 VX ST (VXX): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
DEUTS-XT MS MEX (DBMX): ETF Research Reports
LM-LO VOL HIDIV (LVHD): ETF Research Reports
PRO-SH EUR DV G (EUDV): ETF Research Reports
ACTIVE-BEAR (HDGE): ETF Research Reports
ISHARS-MEXICO (EWW): ETF Research Reports
SPDR-SP500 HD (SPYD): ETF Research Reports
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