5 Defensive ETF Bets for Dealing With Fed Rate Hike Woes
Let's look at some safe ETF plays that investors can consider keeping in mind the rising concerns emanating from the high inflation levels and high chances of a Fed rate...
Wall Street has been volatile since the beginning of 2022 as 10-year Treasury yields rose. The Federal Reserve has also hinted to take aggressive measures to manage rising inflation levels. It is expected to begin raising its benchmark interest rate in March. In fact, Goldman Sachs is expecting the Federal Reserve to increase interest rates four times this year, according to a CNBC article.
There are certain other factors that are clouding the U.S. investment market. Investors are waiting for the fourth-quarter earnings results and the outlook to be presented by corporate America for 2022. Moreover, certain economic data releases like retail sales, industrial production, and U.S. consumer sentiment data may put further light on the U.S. economic recovery.
Against this backdrop, let’s take a look at some defensive ETF options that investors can consider likeVanguard Dividend Appreciation ETF (VIG), Invesco S&P 500 Low Volatility ETF (SPLV), iShares MSCI USA Quality Factor ETF (QUAL), SPDR S&P MIDCAP 400 ETF Trust (MDY)and Vanguard Consumer Staples ETF (VDC).
According to UBS strategists led by senior economist Brian Rose “We expect the US 10-year yield to move ... to around 2% over the coming months, as investors digest the Fed’s more hawkish stance along with further elevated inflation readings. That said, we don’t expect a sharp rise in yields that will imperil the equity rally. Year-over-year inflation is still likely to peak in the first quarter and recede over the year,” as mentioned in a CNBC article.
Defensive ETFs in Focus
Given the current market conditions,we have highlighted some ETFs like:
Vanguard Dividend Appreciation ETF VIG
Dividend aristocrats are blue-chip dividend-paying companies with a long history of increasing dividend payments year over year. Moreover, dividend aristocrat funds provide investors with dividend growth opportunities compared to other products in the space but might not necessarily have the highest yields. These products also form a strong portfolio, with a higher scope of capital appreciation as against simple dividend-paying stocks or those with high yields. As a result, these products deliver a nice combination of annual dividend growth and capital-appreciation opportunity and are mostly good for risk-averse long-term investors.
Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with AUM of $68.05 billion. VIG follows the S&P U.S. Dividend Growers Index. Vanguard Dividend Appreciation ETF charges 6 basis points (bps) in annual fees (read: 5 Top-Ranked ETFs to Add to Your Portfolio for 2022).
Invesco S&P 500 Low Volatility ETF SPLV
Demand for funds with “low volatility” or “minimum volatility” generally increases during tumultuous times. These seemingly-safe products usually do not surge in bull market conditions but offer more protection than the unpredictable ones. These funds are less cyclical, providing more stable cash flow than the overall market.
Invesco S&P 500 Low Volatility ETF provides exposure to stocks with the lowest realized volatility over the past 12 months. The fund is based on the S&P 500 Low Volatility Index and holds 102 securities in its basket. Invesco S&P 500 Low Volatility ETF hasAUM of $9.61 billion and charges an expense ratio of 25 bps, as stated in the prospectus (read: Here's Why it Makes Sense to Invest in Low-Volatility ETFs Now).
iShares MSCI USA Quality Factor ETF QUAL
Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility and high margins. These stocks also have a track record of stable or increasing sales and earnings growth. Compared to plain vanilla funds, these products help lower volatility and perform better during market uncertainty. Further, academic research has proven that high-quality companies constantly provide better risk-adjusted returns than the broader market over the long term.
iShares MSCI USA Quality Factor ETF provides exposure to the large- and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index. With AUM of $24.23 billion, QUAL charges 0.15% in fees (read: Quality ETFs Appear Attractive as Fed Rate Hike Nears).
SPDR S&P MIDCAP 400 ETF Trust MDY
Considering the mixed sentiments, mid-cap funds are gaining attention as they provide both growth and stability compared to their small-cap and large-cap counterparts. As such, investors seeking to capitalize on the strong fundamentals but worried about uncertainty should consider mid-cap ETFs.
SPDR S&P MIDCAP 400 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the S&P MidCap 400 Index. MDY has AUM of $21.65 billion. SPDR S&P MIDCAP 400 ETF Trust charges a fee of 23 bps (see: all the Mid Cap ETFs here).
Vanguard Consumer Staples ETF VDC
The consumer staples sector is known for its non-cyclical nature and acts as a safe haven during unstable market conditions. Moreover, like utility, consumer staples is considered a stable sector for the long term as its players are likely to offer decent returns. During an economic recession, investors can consider parking their money in the non-cyclical consumer staples sector. This high-quality sector, which is largely defensive, has been found to have a low correlation factor with economic cycles.
Vanguard Consumer Staples ETF seeks to track the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. With AUM of $6.66 billion, VDC has an expense ratio of 10 bps.
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Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
SPDR S&P MidCap 400 ETF (MDY): ETF Research Reports
iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
Invesco S&P 500 Low Volatility ETF (SPLV): ETF Research Reports
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