5 Big Reasons to Bet on Defensive ETFs Now

·5 min read

Last week was the S&P 500's worst streak since a five-day decline that ended on Feb 22. The index was off 1.69%, the Dow Jones retreated 2.15% and the Nasdaq lost 1.61% last week. The Russell 2000 dropped 2.81% last week. Investors are growing more cautious about the rise of the delta variant of COVID-19. Moreover, September is generally a weak month for Wall Street.

Against this backdrop, we highlight a few reasons why one should opt for defensive ETFs this September.

COVID-19 Delta Scare

The spread of the Delta variant is a key negative. The variant, first detected in India, remains the most worrying. The WHO classifies Delta as a variant of concern as it is increasing transmissibility, causing more severe symptoms or lowering the efficacy of vaccines and treatments. Notably, Britain’s economy barely grew in July owing to the spread of the Delta variant.

The earnings estimates of the S&P 500 components is also showing signs of a slowdown. The magnitude of positive third-quarter estimate revisions is notably below what we had seen in the comparable periods of the last three earnings seasons. The Delta variant can be held responsible for the loss of momentum.

Fed Taper Talks

The Fed’s taper talks are rife in the market, especially after the European Central Bank (ECB) walked kind of that way. The ECB will slow down emergency bond purchases over the coming quarter. This would be a step forward for the ECB toward unwinding the emergency aid that has shored up the Euro zone economy during the coronavirus pandemic (read: ECB Trims Support, Will Fed Follow Suit? ETFs in Focus).

Such a move by the ECB may trigger Fed’s taper talks. In any case, markets were abuzz with such speculations in August. The tapering move is more meaningful for the United States as U.S. inflation is running high. Federal Reserve Bank of New York President John Williams said the U.S. central bank is likely still on track to slow the pace of its bond-buying stimulus effort this yearalthough he did not mention the timeframe (read: Top ETF Stories of August).

Stock Market Bubble?

The S&P 500 and Nasdaq have been near all-time highs despite a disappointing jobs report, soaring COVID-19 cases and taper talks. Miller Tabak chief market strategist Matt Maley raised a warning sign against such stock market behavior, as quoted on CNBC.

Per the article, Maley believes that today’s market bubble is similar to “red flags during the 1999-2000 and 2007-2008 peaks. During the dotcom bubble, for example, he says stocks shot sky-high no matter the fundamentals much like AMC and GameStop have this year.”

He indicated that the QQQ Nasdaq 100 ETF now trades at a 70% premium to its 200-week moving average, pretty higher than where it was before the last few corrections. Another market watcher warns there's a 'fair chance' stocks may decline 25%, as quoted on businessinsider.com. While such predictions may go wrong and stocks may soar if the COVID-19 crisis is handled efficiently, overvaluation concerns remain.

Higher Corporate Taxation in the Cards?

Two senior U.S. Senate Democrats recently forwarded a proposal to levy a 2% excise tax on corporate stock buybacks to finance President Joe Biden's $3.5 trillion domestic investment plan. Per Democrats, such a move would force companies to shell out more on workers and less on share repurchases (which normally boosts stock prices).

Tensions With China

The tension betweenthe United States and China has been rising. Cybersecurity breaches originating from China, Beijing’s handling of the coronavirus pandemic and the ongoing trade tensions are rife.

ETFs in Focus

AGFiQ U.S. Market Neutral Anti-Beta Fund BTAL

The underlying Dow Jones U.S. Thematic Market Neutral Anti-Beta Index is a long / short market neutral index that is dollar-neutral.

Cambria ETF Trust - Cambria Tail Risk ETF TAIL

The Cambria Tail Risk ETF seeks to mitigate significant downside market risk. The fund intends to invest in a portfolio of out of the money put options purchased on the U.S. stock market.

Franklin Liberty Systematic Style Premia ETF FLSP

The Franklin Liberty Systematic Style Premia ETF seeks to achieve absolute return by allocating its assets across two underlying alternative investment strategies, which represent top-down and bottom-up approaches to capturing factor-based risk premia.

KFA Mount Lucas Index Strategy ETF KMLM

This ETF is active and does not track a benchmark. The KFA Mount Lucas Index Strategy ETF seeks to provide a total return that, before fees and expenses, exceeds that of the KFA MLM Index over a complete market cycle.

ProShares RAFI Long/Short RALS

The FTSE RAFI US 1000 Long/Short Total Return Index allocates an aggregate equal dollar amount to both long and short equity positions. The long equity positions consist of securities in the FTSE RAFI US 1000 Total Return Index and the short equity positions consist of securities in the Russell 1000 Total Return Index.


 


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AGFiQ US Market Neutral AntiBeta ETF (BTAL): ETF Research Reports
 
ProShares RAFI LongShort (RALS): ETF Research Reports
 
Cambria Tail Risk ETF (TAIL): ETF Research Reports
 
Franklin Liberty Systematic Style Premia ETF (FLSP): ETF Research Reports
 
KFA Mount Lucas Index Strategy ETF (KMLM): ETF Research Reports
 
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