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Low-Risk ETFs Taking Off on Rising Tariff Threats

Sweta Killa
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Though the U.S. stock market is advancing to the peak level it set in late January on surging corporate profits and an accelerating economy, trade tensions are blocking the road of the bulls. This is especially true as tensions between the world’s largest economies flared up once again this week (read: S&P 500 to Set New Records: Ride High With These ETFs).

Escalating Trade Tensions

In the latest development, China retaliated with additional tariffs of 25% on $16 billion worth of U.S. goods, including vehicles such as large passenger cars and motorcycles and energy products. The levies will be effective Aug 3, the same day the United States starts hitting duties of 25% on the same amount of imports from China. Both countries already implemented tariffs on $34 billion worth of each other’s goods in July.

Further, China has threatened to impose tariffs on $60 billion worth of American goods if the United States places more tariffs on Chinese imports. The list includes 5,207 new products, including aircraft, soya bean oil, smoked beef, coffee and flour imported from the United States, with charges ranging from 5-25%. This threat came following the news that Trump is mulling over raising tariffs from a proposed 10% to 25% on $200 billion of Chinese goods (read: 5 ETF Ways to Bet on China's New Tariff Threats).

Renewed trade clash between the United States and China has prompt investors to re-access their portfolio, leading to higher demand for lower-risk securities. As a result, low-risk ETFs are in vogue with many hitting new one-year highs in the latest trading session. Below, we have highlighted those that could perform well in a volatile market, reducing the risk of a downside:

iShares Edge MSCI Min Vol USA ETF USMV

This fund offers exposure to 206 U.S. stocks having lower volatility characteristics than the broader U.S. equity market by tracking the MSCI USA Minimum Volatility Index. It is well spread across a number of securities, with none holding more than 1.6% of assets. From a sector look, information technology, healthcare, consumer staples, and financials take the top four spots with a double-digit allocation each. With AUM of $15.3 billion, the product charges 0.15% in expense ratio and trades in solid average daily volume of 1.8 million shares. It has gained 6.2% so far this year and hit a new high of $55.62. The fund has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Minimum Volatility ETF Hits New 52-Week High).

Nationwide Risk-Based U.S. Equity ETF RBUS

This ETF follows the R Risk-Based US Index and employs a risk-based strategy that seeks to provide upside potential while protecting against losses stemming from volatility. It holds well-diversified 251 stocks in its basket, with none of the securities accounting for more than 2.12% share and none of the sectors making up for more than 17.3% of assets. RBUS has accumulated $116.6 million since its debut less than a year. It charges 30 bps in annual fees and trades in a thin volume of 12,000 shares a day on average. The ETF hit new highs of $27.38, and has gained 4.5% this year.

Fidelity Low Volatility Factor ETF FDLO

This fund offers exposure to the stocks with lower volatility than the broader market by tracking the Fidelity U.S. Low Volatility Factor Index. Holding 128 stocks in its basket, it is well spread across components with none holding more than 4.64% share. From a sector look, the ETF is skewed toward the information technology sector at 25.8% while financials, healthcare, consumer discretionary and industrials round off the next four spots with a double-digit allocation each. The fund has been able to garner just $70.6 million in AUM so far and average daily volume is also low at 19,000 shares. FDLO charges 29 bps in annual fees from investors and a touched new high of $32.93, representing a year-to-date gain of 8.4%.

SPDR SSGA US Large Cap Low Volatility Index ETF LGLV

This product tracks the SSGA US Large Cap Low Volatility Index, holding 117 stocks, with none accounting for more than 1.6% of assets. Financials dominates the fund’s returns with one-fourth share, while information technology and industrials receive double-digit exposure each. LGLV has amassed $109.2 million in its asset base and charges 12 bps in annual fees. Volume is paltry exchanging 5,000 shares in hand on average. The ETF hit new high of $95.15 and is up 5.8% so far this year (read: Value ETFs Regain Momentum: Will This Last?).

DeltaShares S&P 600 Managed Risk ETF DMRS

This ETF seeks to track the S&P 600 Managed Risk 2.0 Index, which is designed to simulate a downside-protected portfolio by utilizing a framework that includes targeted volatility and a synthetic option overlay to hedge the downside risk of the portfolio. DMRS has accumulated nearly $44.5 million in its asset base and trades in a light volume of 5,000 shares. It charges 45 bps in fees per year and reached a new high of $60.42, having gained in double-digits so far this year.

Bottom Line

These products could be worthwhile for low risk tolerance investors and have the potential to outperform the broad market, especially if trade fears continue to dent the sentiments.

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