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How to Play Ongoing Uncertainties With ETFs?

·4 min read

The global market is at a critical juncture right now. The pandemic-driven supply-chain woes and the resultant red-hot inflation, the Russia-Ukraine war that has led to the Western sanctions and the resultant hit to the commodity market, and the central banks’ policy tightening in the developed world to fight inflation may push the global economy into recession over the medium term, if we go by some analysts.

FedEx (FDX) was in the spotlight last week after the company removed its full-year guidance and delivered messaging around its earnings outlook, also stating that macroeconomic trends have "significantly worsened," as quoted on Yahoo Finance. Per FedEx, “global volumes declined as macroeconomic trends significantly worsened later in the quarter, both internationally and in the U.S.”

Morgan Stanley’s lead U.S. equity strategist Michael Wilson has said that while the first half of the year was disturbed by inflationary pressures and hawkish Federal Reserve policy, the remainder will be troubled by slowing growth and weakness in earnings, the Yahoo Finance article quoted.

The CME Group revealed that there is an 82% chance of a 0.75% rate hike this week and a 18% probability of a 1% rate hike (at the time of writing). A month ago, this data showed a 40%-60% chances between a 75-basis-point and a 50-basis-point rate hike.

The broader market has become extremely volatile and news-driven. So, with a number of deterrents doing the rounds in the market, it is wise to look for quality while picking stocks. Market watchers and participants are thus trying out different investing techniques to land upon trustworthy stocks. In this regard, below we highlight a few interesting strategies.

Quality ETFs

No wonder, such a volatile environment calls for quality investments. SPDR MSCI USA StrategicFactors ETF QUS measures the equity market performance of large and mid-cap companies across the U.S. equity market. It aims to represent the performance of a combination of three factors: value, quality, and low volatility.

There is VanEck Vectors Morningstar Wide Moat ETF MOAT. The fund follows an index which tracks the overall performance of the “attractively priced companies with sustainable competitive advantages.” As a result, this fund calls for quality exposure. MOAT tracks the overall performance of the 20 most attractively priced companies with sustainable competitive advantages.

Low-Volatility ETFs

Low-volatility ETFs have the potential to outpace the broader market in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors that usually have a higher distribution yield than the broader markets. iShares MSCI USA Min Vol Factor ETF USMV and Invesco S&P 500 Low Volatility ETF (SPLV) are two such examples in this regard.

Dividend Growth ETFs & High Dividend- Low Volatility ETFs

Companies that have the willingness and ability to pay and grow their dividend over time are called dividend aristocrats. Such activities make them quality picks. U.S.-based dividend growth ETFs include SPDR S&P Dividend ETF SDY, which charges 35 bps in fees and yields 3.43% annually.

Invesco S&P 500 High Dividend Low Volatility ETF SPHD is a winning combination of high dividend and low volatility – the need of the hour. The S&P 500 Low Volatility High Dividend Index comprises of 50 securities traded on the S&P 500 Index that historically have provided high dividend yields and low volatility. It yields 3.84% annually.

Cash-Cow ETFs

Per Investopedia, “a cash cow can refer to a business, product or asset that, once acquired and paid off, will produce consistent cash flow over its lifespan.” In other words, these companies are known for continuous positive cash flows, reflecting their inherent strength. Since we know that a cash cushion is always needed in a rough market, one can easily look at the indicators related to cash flows to measure a company's performance.

Pacer US Cash Cows 100 ETF COWZ gives exposure to large and mid-capitalization U.S. companies with high free cash flow yields. It charges 49 bps in fees and yields 1.87% annually. Meanwhile, Pacer Global Cash Cows Dividend ETF GCOW offers exposure to global companies with high dividend yields backed by a high free cash flow yield. The fund charges 60 bps in fees and yields 4.95% annually.


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SPDR S&P Dividend ETF (SDY): ETF Research Reports
 
VanEck Morningstar Wide Moat ETF (MOAT): ETF Research Reports
 
iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports
 
Invesco S&P 500 High Dividend Low Volatility ETF (SPHD): ETF Research Reports
 
SPDR MSCI USA StrategicFactors ETF (QUS): ETF Research Reports
 
Pacer Global Cash Cows Dividend ETF (GCOW): ETF Research Reports
 
Pacer Us Cash Cows 100 ETF (COWZ): ETF Research Reports
 
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Zacks Investment Research