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ETF Strategies to Play the Rising Virus-Induced Volatility

Sanghamitra Saha

The coronavirus scare resurfaced in the U.S. market on Feb 5 after California declared a state of emergency following its first death, reaching the U.S. death toll from COVID-19 to 11. Wall Street, which has been on a roller coaster ride this week, plunged massively on Feb 5.

The S&P 500, the Dow Jones, the Nasdaq and the Russell 2000 lost about 3.4%, 3.6%, 3.1% and 3.4%, respectively. Due to this turmoil, volatility rose in the markets. iPath Series B S&P 500 VIX Short-Term Futures ETN VXX added about 16.2% on Feb 5.

Some market watchers fear a further slump and higher market volatility. Julian Emanuel, chief equity and derivatives strategist at BTIG, said that the volatility is common during election years, as quoted on MarketWatch.

The Dow has already recorded swings of 3% or more on five events so far in 2020, which is the most since the trade-tension-induced 2018. Stock prices are likely to seesaw on every virus-related update.

Against this backdrop, investors can consider adopting the below-mentioned ETF strategies.

Volatility ETFs Make Fine Bets

The fear gauge — the CBOE Volatility Index (VIX) — tends to outperform when markets are declining or fear-levels pertaining to the future are high. There are several ETF/ETN options available in the market that can provide some exposure to volatility. So, one can play VXX, ProShares VIX Short-Term Futures ETF VIXY) and VelocityShares Daily Long VIX Short-Term ETN VIIX (read: How to Play Market Volatility With ETFs).

Gold to Glitter

The safe-haven rally pushed up precious metal prices. Also, the Fed and several other global central banks are acting dovish. This boosted non-interest-bearing assets like gold. SPDR Gold Trust GLD could thus be played. The fund has gained 7.4% in the past month (read: 3 Safe ETFs for Volatile Markets).

Bet on Investment-Grade Corporate Bonds

The 10-year U.S. Treasury note dropped to an all-time low on Feb 5 as renewed virus fear brightened the appeal for U.S. bonds. The benchmark U.S. treasury yield was 0.92% on Mar 5.  Against this backdrop, investors can opt for bond ETFs that offer benchmark-beating yields.

Investment-grade corporate bonds appear better bets as these offer more stability than the junk ones and yield higher than the treasuries. One can target ETFs like Vanguard Long-Term Corporate Bond ETF VCLT ) (yields 3.29% annually) and SPDR Portfolio Long Term Corporate Bond ETF SPLB (yields 3.54% annually) (read: How to Earn Solid Income With ETFs Amid Record-Low Yield?).

Get Ready for Low Volatility & Defensive ETFs

If volatility levels crawl up, investors can deal with this in various ways. First comes low-volatility U.S. ETFs like iShares Edge MSCI Min Vol USA ETF USMV, (which lost 1.3% this year versus 7.2% losses recorded by the S&P 500). Another way to fight volatility is with defensive ETFs like U.S Market Neutral Anti-Beta Fund BTAL (up 12.3% this year) and AdvisorShares Active Bear ETF HDGE (up 8.4% this year) (read: Low Volatility & Quality ETFs Stay Strong Amid Market Rally).

Take Shelter Under Internet or Online Retail ETFs

If you want to remain invested in the growth areas and still seek shelter from acute stock selloffs, play Internet ETFs. The city lockdowns and self-imposed quarantine would inevitably boost demand for mobile gaming (as a way of indoor entertainment) and online retailing. No wonder, Internet ETFs like O'Shares Global Internet Giants ETF OGIG and ProShares Long Online/Short Stores ETF CLIX would be better-placed (read: Amid the Tech Slump, Internet ETFs Most Resilient to Virus).

Biotech Stocks Should Gain Attention

Amid the coronavirus scare, biotech stocks are appealing bets as many firms are engaged in developing the vaccine for it. Now central bank easing would put this high-growth sector ETF in a sweet spot. iShares Genomics Immunology and Healthcare ETF IDNA (up 3.6% this year) and iShares Nasdaq Biotechnology ETF IBB (down just 0.3%) are good picks(read: Wanna Be a Value Investor? Follow Buffett & Play 2 ETF Areas).

Consumer Staples Should Stand Out

Staples is a non-cyclical space of the broader consumer sector and should do well amid turbulent times. This makes Consumer Staples Select Sector SPDR Fund XLP and Vanguard Consumer Staples Index Fund ETF Shares VDC good picks if volatility flares up. Online retail ETFs like ProShares Online Retail ETF ONLN have even higher chance of doing better.