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ETF Strategies to Follow as Volatility Seems Underpriced

Sanghamitra Saha

August 2019 has been anything but favorable for Wall Street, thanks to the re-escalation in Sino-U.S. trade tensions. SPDR S&P 500 ETF SPY (down 0.1%), SPDR Dow Jones Industrial Average ETF DIA (down 0.3%) and Invesco QQQ Trust QQQ (up 0.1%) — all suffered last month (read: Top and Flop ETF Areas of August).

However, due to this turmoil, volatility in the market gained. iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) added about 6.1% in August. While markets recouped some gains this week on trade optimism, some market watchers are still fearing a slump and higher market volatility.

As stated in a Bloomberg article, “commonly known as the VIX, the gauge uses options prices to track the 30-day implied volatility for S&P 500 Index stocks. It’s currently at around 18. The fair value for this month should be closer to 25, the highest for any September since 2012, Macro Risk Advisors derivatives and quantitative strategist Maxwell Grinacoff wrote in a research note.”

Historical 30-day volatility in the S&P 500 Index last month touched the highest level since February. Stock prices were seesawing on every trade-related actions and counteractions. The Fed had also been sending mixed signals about its future course on monetary policy.

If the forecast about volatility is correct, investors can seek refuge to the below-mentioned ETF areas.

Volatility ETFs Itself

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).

Bet Blindly on Dividend Growers

Dividend aristocrats are dividend-paying companies, which have a long history of raising dividend payouts each year. These provide hedge against economic uncertainty and are high-quality in nature. The S&P 500 Dividend Aristocrat Index has historically outperformed the S&P 500 Index with lower volatility over a longer period of time.

So, one can play funds like Proshares S&P 500 Dividend Aristocrats ETF NOBL and SPDR S&P Dividend ETF SDY (read: 3 Dividend Growth ETFs & Stocks to Counter Looming Volatility).

Gold to Glitter

Rising trade spats and 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. Gold will average $1,560 in 2020, BNP said in the note, as stated in Bloomberg. SPDR Gold Trust (GLD) could thus be played(read: Gold ETF Inflows Hits 6-Year High: How to Go Long).

Consumer Staples Should Stand Out

Though there was lot of debacle on the global trade front, U.S. consumer confidence remained around a 19-year high. In fact, the Federal Reserve Bank of New York’s president John Williams told reporters on Sep 4, “the consumer is now carrying all of the weight, or much of the weight, for growth going forward.”

Moreover, staples is the 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.

Low Volatility ETFs to Sizzle

Low volatility ETFs were on the radar as investors flocked to iShares Edge MSCI Min Vol U.S.A. ETF USMV last month. The fund garnered about $2.14 billion in assets in August. If you are worried about a more volatile market, you can seek refuge in this segment (read: 5 ETF Zones to Take Shelter From Trade War).  

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SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
 
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
 
SPDR Gold Shares (GLD): ETF Research Reports
 
ProShares S&P 500 Dividend Aristocrats ETF (NOBL): ETF Research Reports
 
iShares Edge MSCI Min Vol USA ETF (USMV): ETF Research Reports
 
Consumer Staples Select Sector SPDR Fund (XLP): ETF Research Reports
 
SPDR S&P Dividend ETF (SDY): ETF Research Reports
 
iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX): ETF Research Reports
 
ProShares VIX Short-Term Futures ETF (VIXY): ETF Research Reports
 
VelocityShares VIX Short Term ETN (VIIX): ETF Research Reports
 
Invesco QQQ (QQQ): ETF Research Reports
 
SPDR S&P 500 ETF (SPY): ETF Research Reports
 
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