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Low Beta ETFs for a Volatile Market

Sweta Killa

Since the start of August, the stock market has been affected by worsening U.S.-China trade war and fears of global slowdown, especially after President Donald Trump unexpectedly threatened to impose a new tariff of 10% on the remaining $300 billion of Chinese goods effective Sep 1.

The new duty, which is expected to increase 25% or more later, will be levied on a long list of goods including smartphones, laptop computers and children’s clothing. With this, the United States will effectively tax all Chinese imports. China retaliated by allowing the yuan to slip to the lowest level against the dollar in more than a decade, sparking currency war concerns. Per Bloomberg News, China has halted imports of U.S. agricultural products (read: After Yuan Devaluation, Likely Chinese Retaliation & ETF Ways).

Additionally, less-than-expected Fed’s dovish view added to the woes. Though the central bank lowered interest rates for the first time in more than a decade, it dampened hopes of a string of rate cuts to shore up the economy. Further, a slew of downbeat economic data also resulted in decline in the market. The U.S. ISM manufacturing index dropped for the fourth straight month in July to record the lowest reading since August 2016. U.S. Non-manufacturing (services) index also dropped last month.

Against such a backdrop, investors seeking to remain invested in the equity world could consider low beta ETFs.

Why Low Beta?

Beta measures the price volatility of stocks relative to the overall market. It has direct relationship to market movements. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market.

That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market is crumbling. Given lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus lag their peers (read: Trump Threatens New Tariff: 5 ETF Buying Zones).

Though utilities, real estate and consumer staples sector are low beta sectors, we have highlighted ETFs that offer broad exposure across various sectors and have AUM of more than $50 million, indicating good tradability. Here are six funds that could be intriguing options for investors amid bouts of volatility.

Pacer Trendpilot US Mid Cap ETF PTMC – Beta: 0.45

This ETF follows the Pacer Trendpilot US Mid Cap Index, which uses an objective, rules-based methodology to implement a systematic trend-following strategy that directs 100% exposure to the S&P MidCap 400 Index, or 50% to the S&P 500 and 50% to 3-Month US Treasury bills, or 100% to 3-Month US Treasury bills, depending on the relative performance of the S&P MidCap 400 Total Return Index & its 200-day simple moving average. The fund has AUM of $648 million and charges 62 bps in annual fees. Average trading volume is good at 129,000 shares.

Pacer Trendpilot US Large Cap ETF PTLC – Beta: 0.60

This ETF follows the Pacer Trendpilot US Large Cap Index, which uses an objective, rules-based methodology to implement a systematic trend-following strategy that directs 100% exposure to the S&P 500 Index, or 50% to the S&P 500 and 50% to 3-Month US Treasury bills, or 100% to 3-Month US Treasury bills, depending on the relative performance of the S&P 500 index & its 200-business day historical simple moving average. The fund has AUM of $2.4 billion and charges 60 bps in annual fees. Average daily volume is solid, exchanging more than 546,000 shares in hand.

Global X SuperDividend U.S. ETF DIV – Beta: 0.61

This fund provides exposure to 50 highest-dividend-yielding U.S. securities by tracking the INDXX SuperDividend U.S. Low Volatility Index. Mortgage REITs account for 19% of the portfolio, closely followed by consumer staples (14.8%), MLPs (14.6%) and communication services (11.4%). The product has amassed $498.9 million in its asset base while trading in moderate volume of about 128,000 shares. It charges 45 bps in fees per year from investors and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 5 Dividend ETFs to Pick Amid Fed Rate Cut Talks).

Invesco S&P 500 Low Volatility ETF SPLV – Beta: 0.64

This ETF provides exposure to stocks with the lowest-realized volatility over the past 12 months. It tracks the S&P 500 Low Volatility Index and holds 100 securities in its basket. Utilities, financials and real estate make up for the top three sectors with a double-digit allocation each. The fund has amassed $11.8 billion in its asset base and trades in heavy volume of nearly 2.9 million shares a day on average. It charges 25 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Low Volatility ETFs For Turbulent Time).

WBI Bull|Bear Quality 1000 ETF WBIL - Beta: 0.65

This fund is actively managed and seeks long-term capital appreciation. It has the potential for current income. It also seeks to provide protection in unfavorable market conditions. It invests in large-cap domestic and foreign securities with attractive value characteristics and prospects for financial stability. WBIL has amassed $54.3 million and charges 1.07% in annual fees. It trades in lower volume of 27,000 shares a day on average.

Legg Mason Low Volatility High Dividend ETF LVHD – Beta: 0.65

This fund provides exposure to 79 U.S. companies with a relatively high yield, low price and earnings volatility by tracking the QS Low Volatility High Dividend Index. Utilities dominates the fund’s portfolio with 25.7% share while real estate and consumer staples round off the next two spots. The ETF has $703.1 million in AUM and trades in moderate volume of 70,000 shares. It charges 27 bps in fees and has a Zacks ETF Rank #3.

Bottom Line

Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability to the portfolio, protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in the current market environment and seeking outperformance.

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