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Has the First "Correction Since October" Started? ETFs to Play

Sanghamitra Saha

Global markets were on a freefall in the latest trading sessions thanks to China’s coronavirus scare, which was reported last week and is now spreading fast and wide. The SARS-style coronavirus, in fact, has spread to the other parts of the world too, impacting global travel demand materially. While travel and material stocks took a big hit from the issue, the broader market too was not spared.

So far, there have been about 3000 cases of coronavirus and the death toll in China is more than 100. What’s more, there were more-or-less 17 cases confirmed in Hong Kong, Macao and Taiwan. Rest of Asia, Europe, North America and Australia confirmed 26, 3, 6 and 4cases respectively (read: Sector ETFs & Stocks to Gain/Lose on Coronavirus Outbreak).

Thanks to the growing virus scare, the S&P 500 and the Dow Jones lost 1.6% each on Jan 27 while the Nasdaq Composite was off 1.9%, respectively. In fact, the S&P 500 (down 0.8%), the Dow Jones (down 1.12%) and the Nasdaq (down 0.5%) — were also in the red last week. All-world ETF iShares MSCI ACWI ETF ACWI lost 2.7% in the past five days while iShares Asia 50 ETF AIA shed about 4.5% past week (as of Jan 27, 2020). With China being the epicenter of the disease, Asia stocks were the hardest hit.

Is It Only Coronavirus That Should be Blamed?

Having said all, we would like to note that coronavirus probably shouldn’t be blamed altogether for the massacre.  At least some analysts believe so. The “real culprit is market sentiment.” Sentiments were solid since the announcement of the phase-one U.S.-China trade deal in October. Coronavirus has thus acted as a trigger to correct the rich valuation.

Morgan Stanley’s chief U.S. equity strategist Michael Wilson believes that the first market “correction since October” has started. A correction is normally defined as the 10% decline from a recent high. However, Morgan Stanley here expects a 5% (or less) pullback in the S&P 500, per an article published on MarketWatch. The traditional correction is less likely to take place now as global policy easing has been a great support to the markets.

Against this backdrop, investors might choose to bet on the ETFs that have a P/E (36 months) less than the P/E of the S&P 500 ETF SPY (about 20 times) and lost less than the S&P 500 on Jan 27.

Health Care Select Sector SPDR Fund XLV – P/E 17.58x

The fund targets stocks from pharmaceuticals; health care providers & services; health care equipment & supplies; biotechnology; life sciences tools & services; and health care technology sectors. Along with cheaper valuation, the fund should perform better in the present environment as the virus scare boosts demand for medical products and services. The fund has a Zacks Rank #2 (Buy) and lost only 0.8% on Jan 27 (read: What Lies Ahead for Healthcare ETFs in Q4 Earnings?).

Vanguard High Dividend Yield Index Fund ETF Shares VYM – P/E 17.90x

Dividend funds do well in a volatile environment. The underlying FTSE High Dividend Yield Index consists of common stocks of companies that pay out dividends that generally are higher than average. The Zacks Rank #2 fund yields 3.04% annually (read: Buyback or Dividend: Which ETF Has Won Over Time?).

Schwab U.S. Small-Cap ETF SCHA – P/E 16.90x

Small-cap stocks are domestically focused and are thus less susceptible to the global growth slowdown caused by the virus contagion. The fund has a Zacks Rank #1 (Strong Buy). The fund lost 1.3% on Jan 27.

Vanguard Mid-Cap Value Index Fund ETF Shares VOE – P/E 16.90x

This fund is based on mid-cap stocks which take the middle-of-the-road approach between large- and small-cap stocks. Moreover, its value focus makes it more compelling. The Zacks Rank #2 fund was off 1.5% on Jan 27.

SPDR MSCI World StrategicFactors ETF QWLD – P/E 18.04x

Though it is a global fund, it does not have direct exposure to China. It is heavy on the Unite States while Japan makes up about 9.9% of the fund. The underlying MSCI World Factor Mix A-Series Index captures large and mid-cap representation across 24 developed countries and aims to represent the performance of value, low volatility, and quality factor strategies. The fund lost 1.6% on Jan 27 and currently has a Zacks Rank #2.

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