Low-Beta ETFs to Tap Amid Stock Market Selloff

The latest developments in the U.S.-China trade front have sparked fears of renewed tensions. The Trump administration blacklisted eight more Chinese technology giants on human rights concern on Oct 7.

This is the first time that the Trump administration has shown human rights as a reason for blacklisting companies. The previous exclusion of Huawei Technologies Co. was in interest of national security. Also, the Trump administration’s decision to levy visa restrictions on Chinese government officials “connected to the mass detention of Uighurs in western China” made matters worse.

Not only in the United States, things are shaky on the global front too. The chances of Britain leaving the European Union with a deal on Oct 31 are less. That might lead to a general election which might result in a 'no deal' Brexit or “a new coalition government led by leftwinger Jeremy Corbyn that would give voters the chance to remain in the European Union.”

Apprehension of a chaos caused by the Brexit drama kept global markets edgy lately. The investing world wants Britain to be part of the European Union but is not comfortable with “Corbyn's tax and nationalization agenda,” if we go by a CNN article.

Meanwhile, the Turkish lira remained under pressure after Trump threatened to “obliterate” Turkey’s economy if the country goes “off limits” in terms of launching any operation in Syria.

As a result, there was a broad-based global market selloff. All-World iShares MSCI ACWI ETF ACWI lost more than 1.3% on Oct 9. Against such a backdrop, investors might want to consider low-beta ETFs.

Why Low Beta?

Beta measures the price volatility or systematic risk of stocks relative to the overall market. It has direct relationship to market movements. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile while a beta of less than 1 shows that the price of the stock or fund is less volatile than the market.

That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and usually lose less when markets are sinking. Given lesser risks and lower returns, these are considered safer. Nevertheless, in a soaring market, these low-beta products underperform their high-beta cousins.

ETFs in Focus

Schwab U.S. TIPS ETF SCHP – Beta 0.02

As the U.S. treasury bond yields slumped, bonds ETFs including TIPS have all the reasons to ascend.

Utilities Select Sector SPDR Fund XLU – Beta 0.21

This is a safe and non-cyclical sector which performs well in a low rate environment. Investors should note that rising safe-haven trade and a dovish Fed acted as tailwinds for the sector.

Consumer Staples Select Sector SPDR Fund XLP – Beta 0.61

Consumer Staples sector is also non-cyclical in nature and fares better in a low rate environment.

Vanguard Real Estate Index Fund VNQ – Beta 0.61

Real Estate is yet another sector that is a great beneficiary of the low levels of interest rate, which currently the case is.

Invesco S&P 500 Low Volatility ETF SPLV – Beta 0.64

Low-volatility ETFs are also a great tool to tackle bouts of stock market turmoil. “Academic studies show that lower risk stocks have rewarded investors with higher risk-adjusted returns than the broader markets over longer-term” (read: Low Volatility ETFs for Turbulent Times).

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Schwab U.S. TIPS ETF (SCHP): ETF Research Reports
 
Vanguard Real Estate ETF (VNQ): ETF Research Reports
 
Consumer Staples Select Sector SPDR Fund (XLP): ETF Research Reports
 
Utilities Select Sector SPDR Fund (XLU): ETF Research Reports
 
Invesco S&P 500 Low Volatility ETF (SPLV): ETF Research Reports
 
iShares MSCI ACWI ETF (ACWI): ETF Research Reports
 
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