Wall Street continues to see extreme volatility in market movements. After some relief rally, all three major indexes again ended the trading session in red. The Dow Jones Industrial Average lost about 1.5% on Feb 3. Moreover, the S&P 500 and the Nasdaq Composite indices were down 2.4% and 3.7%, respectively, on the same day. In fact, the tech-heavy index witnessed its worst daily performance since September 2020 (per a CNBC article).
The pessimism in the market was largely due to disappointing fourth-quarter 2021 results reported by social media giant Meta Platforms (FB) after the closing bell on Feb 2. The company lost daily users in a quarter for the first time since it went public in 2012 and provided a weak revenue guidance for the ongoing quarter. Meta Platforms missed on earnings estimates though it beat on revenues.
In this regard, Goldman Sachs’ Chris Hussey commented that “The sharp drop in FB market cap today and the accompanying drag on the S&P500 index is ... a stark reminder of the high concentration of mega-cap Tech stocks in the S&P 500 — and the vulnerabilities that such concentration brings,” as mentioned in a CNBC article.
Several other concerns like the fourth-quarter earnings season, mixed economic data releases and the chances of fed rate hikes can keep clouding market sentiments. Post the Federal Reserve Open Market Committee’s meeting, Chairman Jerome Powell indicated that the first rate hike since 2018 could be seen as early as March 2022. The Federal Reserve has already started tapering bond purchases, which it expects to complete by this March. However, the magnitude and the month of the interest rate hike have not been clearly stated yet.
Thus, seeing the current market gyrations and the investment environment, here are some ETF choices for investors:
SPDR S&P Bank ETF KBE
The shift toward a tighter monetary policy will push yields higher, thereby helping the financial sector. This is because rising rates will help in boosting profits for banks, insurance companies, discount brokerage firms and asset managers. The steepening of the yield curve (the difference between short and long-term interest rates) is likely to support banks’ net interest margins. As a result, net interest income, which constitutes a chunk of banks’ revenues, is likely to receive support from the steepening of the yield curve and a modest rise in loan demand.
SPDR S&P Bank ETF seeks to provide investment results that before fees and expenses generally correspond to the total return performance of the S&P Banks Select Industry Index. It has AUM of $3.70 billion and charges 0.35% in expense ratio (read: ETFs to Buy on Likely March Rate Hike And More Thereafter).
Invesco Dynamic Energy Exploration & Production ETF PXE
Investors are closely tracking the energy sector, which is showing strength as global demand and economic growth levels are on the path of recovery from the pandemic lows. Oil prices have been rising since the beginning of 2022. The upside in crude oil prices is triggered by various factors like easing Omicron variant concerns, supply shortages, and geopolitical tensions in Eastern Europe and the Middle East. In fact, the prices for U.S. oil surged past $90 on Feb 3 for the first time since 2014 (per a CNBC article). Despite rising demand for petroleum products, the upside is being observed as limited supply remains a challenge.
The fund seeks to track the performance of the Dynamic Energy Exploration & Production Intellidex Index. With AUM of $181.9 million, the fund has an expense ratio of 63 basis points (bps) (read: Energy ETFs Hitting New 52-Week High).
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, is 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 $6.63 billion, VDC has an expense ratio of 10 bps (read: Nasdaq in Correction: ETF Strategies to Play
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 has been providing 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 103 securities in its basket. Invesco S&P 500 Low Volatility ETF hasAUM of $9.52 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 $23.23 billion, QUAL charges 0.15% of fees (read: Quality ETFs Appear Attractive as Fed Rate Hike Nears).
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SPDR S&P Bank ETF (KBE): 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
Invesco Dynamic Energy Exploration & Production ETF (PXE): ETF Research Reports
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