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U.S. Stocks See Worst Day in Months: Low-Risk ETFs in Focus

Sweta Killa

After peaking last week, the U.S. stock market has retreated again with escalation in the trade tariff spat between the United States and China. This is especially true as Trump has threatened to increase tariffs from 10% to 25% on Chinese goods worth $200 billion, which he has been holding back since February on hopes of a positive deal, as soon as this week (read: Trump Tariff Threats Resume: How to Profit With Inverse ETFs).  

Plus, he is also seeking to impose another 25% tariff on further $325 billion of Chinese goods "shortly." If Trump does as he threatens, essentially all products imported to the United States from China will face some sort of tariff. While both negotiators are slated to meet in Washington on Wednesday to end a year-long trade dispute, there is the risk that the new deal may not come through before the new round of tariff implementation by the end of this week.

This concern has resulted in a tailspin for the U.S. stock market. In fact, Wall Street saw worst day in several months in May 7 trading, declining nearly 2%. The Dow Jones Industrial Average registered its worst day since Jan 3 while the S&P 500 and Nasdaq Composite Index marked the worst day since Mar 22. Technology and industrial sectors were hit hard in the broad sell-off as their business inherently relies on the global trade of materials and finished goods (read: Trade-Sensitive Sector ETFs in Focus on New Tariff Threat).

Renewed trade clash between the United States and China has prompted investors to re-access their portfolio, leading to higher demand for safe-haven avenues or lower-risk securities. As a result, we have highlighted five such zones and their popular ETFs where investors could stash their money amid this volatility:

Low Volatility - iShares Edge MSCI Min Vol USA ETF USMV

Low-volatility ETFs have the potential to outpace the broader market in an uncertain market 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.

While there are several options, USMV with AUM of $25.7 billion and average daily volume of 4.4 million shares is the most popular ETF. The fund charges 15 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: Low-Volatility ETFs Trading at a 52-Week High).

Defensive - Invesco Defensive Equity ETF DEF       

Investors could rotate into defensive sectors like utilities, healthcare and consumer staples, which generally outperform during periods of low growth and high uncertainty. DEF seems an excellent choice as it offers exposure to companies having potentially superior risk-return profiles during periods of stock market weakness, while still offering potential for gains during periods of market strength. The fund has accumulated $220.9 million in its asset base and sees lower volume of 19,000 shares per day on average. It charges 59 bps in fees per year and has a Zacks ETF Rank #3 with a Medium risk outlook.

Gold - SPDR Gold Trust ETF GLD

As gold generally acts as a store of value and hedge against market turmoil, the ultra-popular product tracking this bullion like GLD could be an interesting pick in the current market turbulence. The fund tracks the price of gold bullion measured in U.S. dollars, and kept in London under the custody of HSBC Bank USA. It has AUM of $30.4 billion and trades in heavy volume of nearly 8.1 million shares a day. It charges 40 bps in fees per year from investors and has a Zacks ETF Rank #3 with a Medium risk outlook (read: Here's Why Gold ETFs Are Set to Shine).

Long-Dated Treasury - iShares 20+ Year Treasury Bond ETF TLT

The products tracking the long end of the yield curve often provide a safe haven. TLT provides exposure to long-term Treasury bonds by tracking the ICE U.S. Treasury 20+ Year Bond Index. It is one of the most popular and liquid ETFs in the bond space with AUM of $12.3 billion and average daily volume of 8.6 million shares. Expense ratio comes in at 0.15%. TLT has a Zacks ETF Rank #3.

Dividend - Vanguard Dividend Appreciation ETF VIG

The dividend-paying securities are the major sources of consistent income for investors, when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth like VIG seem to be good picks. The ETF has AUM of $34.1 billion and trades in volume of 1.2 million shares a day on average. It charges 8 bps in annual fees and has a Zacks ETF Rank #3 with a Medium risk outlook (read: A Bunch of Dividend ETFs Hitting All-Time Highs).

Bottom Line

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

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