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Take Shelter in These ETFs as Coronavirus Crisis Worsens

Sweta Jaiswal, FRM

Wall Street witnessed a tug of war between the bulls and bears on Jun 25. Federal Deposit Insurance Commission has eased banking regulations for making substantial investments into funds like venture capital funds which led optimism in bank stocks. Big names like JPMorgan Chase JPM, Bank of America BAC and Citigroup C gained more than 3% in yesterday’s trading session.

Meanwhile, the United States saw a record number of new coronavirus cases at 37,077 in a single day on Jun 25. The number of new cases surpassed the previous high of 36,291 recorded on Apr 24, per a CNN report. Notably, states like Florida, California, Carolinas, Texas and Arizona are seeing increasing number of hospitalizations every day.

Given the rising number of coronavirus cases, some states have started to pause the reopening process. In such a scenario, major retailers, factories, restaurants and hotels might have to shut down operations domestically and abroad. Already Texas Governor Greg Abbott has announced the holding back of reopening plans.

Commenting on the current scenario, Carl Tannenbaum, chief economist at Northern Trust in Chicago, has said that “the renewed outbreak will hinder the recovery,” per The New York Times report. According to the World Trade Organisation (WTO), the pandemic resulted in an 18.5% decline in global trade in the second quarter of 2020 (according to a CNN report).

Going on, Fed Chair Jerome Powell maintained a dovish stance in the FOMC meeting, concluded on Jun 10. He informed that there is no expectation of a rate hike through 2022. The Fed has pledged to continue pumping in stimulus to support the economy and strengthen it. The central bank has also reiterated that the Fed funds rate would likely stay at the 0-0.25% range and confirmed continued bond-buying. The central bank forecasts unemployment rate decline to 9.3% by the end of this year. Though the figure is down from May’s 13.3%, it will be noticeably above 3.5% recorded in February — a near 50-year low.

The unemployment rate will later likely improve to 6.5% in 2021. The U.S. GDP is projected to shrink 6.5% this year before rebounding 5% next year and 3.5% in 2022. Inflation is also forecast to remain below the Fed’s 2% target through 2022. For the 14th week in a row, new unemployment claims surpassed one million on Jun 25. Nearly 1.5 million workers filed new claims for state unemployment insurance for the week ending Jun 19. Going on, another 728,000 filed for benefits from federally funded emergency program, Pandemic Unemployment Assistance (per The New York Times report).

ETFs to the Rescue

Given the situation, let’s take a look at some ETFs that investors can follow for a smooth sail in these turbulent times.

WisdomTree U.S. Quality Dividend Growth Fund DGRW

The appeal of dividend ETFs has been rising in the face of easing monetary policy on the global front and market uncertainty triggered by the pandemic and deceleration in global growth. This is because dividend-paying securities are major sources of consistent income for investors when returns from equity markets are uncertain.

This fund seeks to track the investment results of dividend-paying large-cap companies, with growth characteristics in the U.S. equity market. It has AUM of $3.24 billion and an expense ratio of 28 basis points (read: A Quick Guide to Dividend Aristocrat ETFs).

SPDR Gold Shares GLD

Yellow metal investments have been popular this year due to the coronavirus outbreak and it recently closed at its highest level since 2012. Notably, the global stash of gold in ETFs touched the highest level in seven years in the middle of the first quarter of 2020.

GLD is the largest and most-popular ETF in the gold space, with AUM of $66.36 billion. The fund reflects the performance of the price of gold bullion, less the Trust's expenses. At launch, each share of this ETF represented about 1/10th of an ounce of gold. Expense ratio is 0.40% (read: Worst Market Drop in About Two Weeks: ETF Strategies to Win).

iShares Edge MSCI Min Vol USA ETF USMV

Low-volatility products could be intriguing choices for those who want to stay invested in equities but like the idea of focusing on minimum volatility. Low-volatility ETFs generally tend to offer positive risk-adjusted gains, though not enormous.

While there are several options, USMV with AUM of $33.60 billion, is the most popular ETF. The fund charges 15 bps in annual fees (read: 5 ETF Buying Zones on Market Gyrations).

Cambria Tail Risk ETF TAIL

This fund seeks to mitigate significant downside market risk as it invests in a portfolio of "out of the money" put options purchased on the U.S. stock market. TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high. While a portion of the fund's assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries.

TAIL has amassed $243.3 million in its asset base and charges 59 bps in annual fees from investors.

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JPMorgan Chase Co. (JPM) : Free Stock Analysis Report
 
Bank of America Corporation (BAC) : Free Stock Analysis Report
 
Citigroup Inc. (C) : Free Stock Analysis Report
 
SPDR Gold Shares (GLD): ETF Research Reports
 
iShares Edge MSCI Min Vol USA ETF (USMV): ETF Research Reports
 
WisdomTree U.S. Quality Dividend Growth ETF (DGRW): ETF Research Reports
 
Cambria Tail Risk ETF (TAIL): ETF Research Reports
 
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