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5 Safe Investing Zones &Their ETFs to Escape Market Rout

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Soaring yields and tightening Fed policy have been playing foul on the stock market, pushing the stocks in deep red from a year-to-date look. The S&P 500 Index is down about 18% so far in 2022 and the Nasdaq Composite Index has dropped about 27%, hit by plunging growth stocks. Almost two-thirds of S&P 500 stocks are down 20% or more from their 52-week highs, according to Refinitiv data.

Inside the Turmoil

The Federal Reserve has started raising interest rates more aggressively to fight inflation that will hit consumers and businesses. Fed Chair Jerome Powell has raised interest rates by 50 bps in the latest FOMC meeting. This marks the biggest interest-rate hike since 2000. Inflation is not showing any sign of a slowdown, jumping 8.3% year over year in April. Though it is down from an 8.5% year-over-year increase in March, it still represents the second-highest inflation in four decades.

The war in Ukraine worsened disruptions in the flow of goods across borders, resulting in skyrocketing food and energy prices. The higher prices have started to take a hit on corporate profits. Consumer sentiment reached the lowest level since 2011 in May, according to the latest reading of the University of Michigan Sentiment index. Manufacturing activity also grew at its slowest pace in more than one and a half years in April. Notably, the U.S. economy shrank for the first time since the outbreak of the pandemic. GDP dropped 1.4% annually in the first quarter of 2022, marking a sharp reversal from 6.9% annual growth in the fourth quarter (read: U.S. Economy Shrinks in Q1: ETFs to Win/Lose).

Additionally, COVID-19 variant concerns and the resultant lockdown measures in China have sparked worries over global economic expansion that continued to weigh on investors’ sentiment.

The events have led to risk-off trading, with lower-risk securities being in vogue. Below, we have highlighted an ETF from five such zones in which investors could stash their money amid the market turmoil:

Low-Beta

Low-beta ETFs exhibit greater levels of stability and usually lose less when the market is crumbling. Though these have lesser risks and lower returns, the stocks are considered safe and resilient.

Invesco S&P 500 Downside Hedged ETF PHDG is an actively managed fund and seeks to deliver positive returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns. Invesco S&P 500 Downside Hedged ETF tries to follow the S&P 500 Dynamic VEQTOR Index, which provides broad equity market exposure with an implied volatility hedge by dynamically allocating between different asset classes: equity, volatility and cash. The index allows investors to receive exposure to the equity and volatility of the S&P 500 Index in a dynamic framework (read: 5 ETFs to Protect Your Portfolio Amid Market Sell-Off).

Invesco S&P 500 Downside Hedged ETF has accumulated $317.8 million in its asset base and charges 40 bps in fees per year from its investors. It has a beta of 0.33. Volume is good, exchanging 156,000 shares a day on average.

Low Volatility

These products have the potential to outpace the broader market providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement. Further, these allocate more to defensive sectors with a higher distribution yield than the broader markets.

While there are several options, iShares Edge MSCI Min Vol USA ETF USMV, with AUM of $26.9 billion and an average daily volume of 3.4 million shares, is the most popular ETF. The fund offers exposure to stocks that have lower volatility characteristics relative to the broader U.S. equity market. iShares Edge MSCI Min Vol USA ETF tracks the MSCI USA Minimum Volatility Index, holding 173 stocks in its basket. The product charges 15 bps in annual fees and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Value

Value stocks have proven to be outperformers over the long term and are less susceptible to the trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts.

iShares Core S&P U.S. Value ETF IUSV offers exposure to large- and mid-cap U.S. equities that exhibit value characteristics by tracking the S&P 900 Value Index. It holds 742 stocks in its basket, with each accounting for no more than a 3.1% share. iShares Core S&P U.S. Value ETF is widely spread across sectors with health care, financials, industrials, information technology and consumer staples occupying double-digit exposure each (read: 4 ETFs to Ride on Fed's 50 Bps Rate Hike).

iShares Core S&P U.S. Value ETF has AUM of $11.5 billion and trades in an average daily volume of 643,000 shares. It charges 4 bps in annual fees and has a Zacks ETF Rank #1 (Strong Buy) with a Medium risk outlook.

Quality

Quality investing also seeks safety and protection against volatility. Quality stocks tend to outperform as these are rich in value characteristics, with healthy balance sheets, high return on capital, low volatility, elevated margins and a track of stable or rising sales and earnings growth.

iShares MSCI USA Quality Factor ETF QUAL provides exposure to 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. iShares MSCI USA Quality Factor ETF holds 124 securities in its basket and trade in an average daily volume of 1.5 million shares. The ETF has AUM of $20.7 billion and charges 15 bps in annual fees.

Dividend

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 worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

Vanguard Dividend Appreciation ETF VIG is the largest and the most popular ETF in the dividend space, with AUM of $62.4 billion and an average daily volume of 1.5 million shares.

Vanguard Dividend Appreciation ETF follows the S&P U.S. Dividend Growers Index, which is composed of companies that have a record of increasing dividends over time. It holds 289 securities in the basket and charges 6 bps in annual fees. The product has a Zacks ETF Rank #1 with a Medium risk outlook.


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Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
 
iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
 
iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports
 
iShares Core S&P U.S. Value ETF (IUSV): ETF Research Reports
 
Invesco S&P 500 Downside Hedged ETF (PHDG): ETF Research Reports
 
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