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Time for Defensive ETFs?

Sanghamitra Saha
Northern Trust (NTRS) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

Consumer prices in the United States rose 2.2% year over year in September 2017, falling shy of market expectations of 2.3% and after a 1.9% increase in the prior month. However, the September reading came in the highest since April, as hurricane-induced output outages at oil refineries in the Gulf Coast area favored energy prices (read: Hurricanes Impact on Earnings ETFs?).

The gasoline index surged 13.1% in September and made up about three-fourth of the rise. On a sequential basis, consumer prices increased 0.5%, the highest since January but below an estimate of 0.6%. Barring food and energy, consumer prices nudged up 0.1%, again missing expectations of 0.2%.

As per an article published on Bloomberg, latest inflation data reinforced the view that U.S. inflation running below the Fed’s target is probably “structural” and not fleeting. The data also missed expectations. The benchmark U.S. Treasury yield was 2.28% on Oct 13 (the day inflation data was released) against 2.33% recorded the day earlier.

On the other hand, Fed Chair Janet Yellen commented on Sunday that her “best guess” is that consumer prices will gather steam in the coming days after a period of sluggishness. With some Fed officials looking strongminded to enact one more rate hike this year irrespective of the inflation scenario, “some money managers are raising the specter of the U.S. yield curve eventually inverting, oftentimes a signal of an impending recession” (read: Fed to Hike in December? Buy Quality ETFs).

Impact on the ETF world

When there is a buzz over a rise in inflation, investors need to know about the behavior of the TIPS ETFs. TIPS offers robust real returns during inflationary periods, unlike its unprotected peers in the fixed-income world.

These securities pay an interest on an inflated-principal amount (principal rises with inflation) and when the securities mature, investors get either the inflation-adjusted principal or the original principal, whichever is greater. As a result, both principal amount and interest payments will keep on rising with increasing consumer prices (read: Forget Inflation Fears with These TIPS ETFs).

Notably, popular TIPS ETFs like iShares TIPS Bond ETF TIP gained about 0.14% on Oct 13, 2017. SPDR Bloomberg Barclays TIPS ETF IPE too added more than 0.1% on that day. But if investors fear any kind of recessionary risk given the Fed’s apparent single-mindedness about rate hike amid sluggish inflation, defensive ETFs could be useful to them (read: New Active Low Risk ETF from Cambria).

Below we highlight a few ETFs:

PowerShares Russell 1000 Low Beta Equal Weight USLB

This fund seeks to track the performance of the Russell 1000 Low Beta Equal Weight Index, holding 373 stocks exhibiting low-beta characteristics. It is widely diversified across components with each security accounting for less than 0.60% of total assets. Consumer Discretionary and Information Technology Industrials are the top sectors of the fund.

QuantShares US Market Neutral Anti-Beta BTAL

Investors who want to shift their focus to investing in low-beta stocks during this uncertain market environment can consider adding BTAL ETF to their portfolio. This fund follows the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index, which is an equal-weighted, dollar-neutral, sector-neutral benchmark. The index identifies the lowest beta stocks and goes long on them, while at the same time goes short on the highest beta stocks.

First Trust Long/Short Equity ETF FTLS

The fund looks to track investors with long-term total returns. The fund intends to pursue its investment objective by establishing long and short positions in a portfolio of Equity Securities. As of Oct 12, 2017, Apple, Berkshire Hills Bancorp and Boeing are top three holdings in its long portfolio while S&P 500 Depositary Receipts (SPDR), Fulton Financial Corporation and Ford Motor occupy top three positions in the short portfolio.

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ISHARS-TIPS BD (TIP): ETF Research Reports
 
FT-LONG/SHRT EQ (FTLS): ETF Research Reports
 
QS-US MN AN-BET (BTAL): ETF Research Reports
 
SPDR-BBC TIPS (IPE): ETF Research Reports
 
PWRSH-RU LBEWP (USLB): ETF Research Reports
 
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