5 Low-Beta ETFs to Invest in Uncertain Markets

·6 min read

U.S. stocks have been caught in a wild swing of trading lately driven by a combination of factors like resurgence in COVID-19 infections, inflation fears, signs of a slowdown in China, potential tax hike increases and Fed tapering talks. All the three major indices have turned negative for the month and is about 3% below their all-time highs (read: ETFs to Win & Lose as Delta Variant Cases Surge).

Additionally, a historical tendency for September to be a weak month for equities has added to the chaos. The Q3 earnings trend has also lost momentum with the magnitude of positive revisions to the estimates notably below the comparable periods of the last three earnings seasons.

Further, warnings of economic catastrophe sent the U.S. stocks into a tailspin. The White House warned on Friday that a failure by the U.S. Congress to extend the debt limit could push the economy into a recession and lead the country to default on its payment obligations. Notably, the Dow Jones logged in the three straight weeks of losses for first time in 2021 while the S&P 500 notched the second straight week of losses.

However, the wider spread of COVID-19 vaccines, a greater vaccination push, improving economic growth, an expanded stimulus and the resumption of corporate earnings growth have powered the rally this year and will likely continue to do so. In fact, Wall Street is the most bullish on stocks in almost two decades with about 56% of all recommendations on the S&P 500 firms listed as buys, the highest since 2002.

As a result, investors may want to remain invested in the equity world but at the same time seek protection from a downside. This could be easily achieved by investing in low-beta products.

Why Low Beta?

Beta measures the price volatility 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 indicates 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 will usually lose less when the market crumbles. Given lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus lag their peers (read: Mid-Cap ETFs Looking Good Amid Market Uncertainties).

With the help of etfdb.com, we have highlighted five low-beta ETFs targeting broad markets that could be intriguing options for investors amid the current market turbulence. All the funds offer exposure to a number of sectors and have AUM of more than $50 million, indicating their good tradability.

Invesco S&P 500 Downside Hedged ETF PHDG – Beta: 0.32

This actively managed fund seeks to deliver positive returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns. It 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. The fund has accumulated $234.2 million in its asset base and charges 40 bps in fees per year from its investors. Volume is good, exchanging 73,000 shares a day on average (read: Invest in These Hedge Volatility ETFs to Protect Your Portfolio).

FT Cboe Vest Fund of Deep Buffer ETFs BUFD – Beta: 0.38

This is an actively managed ETF providing investors exposure to U.S. large-cap equity stocks while limiting downside risk through a laddered portfolio of 12 FT Cboe Vest U.S. Equity Deep Buffer ETFs. It seeks to provide returns that match the price return of the SPDR S&P 500 ETF Trust (SPY), up to a predetermined upside cap, while providing a buffer against losses between 5% and 30% of SPY, over a defined one-year period. BUFD has amassed $175.6 million in its asset since its inception in January and trades in an average daily volume of 74,000 shares. It charges 1.05% in annual fees.

Nationwide Risk-Managed Income ETF NUSI – Beta: 0.42

This ETF targets high income with lower risk as it uses a rules-based options trading strategy. It seeks to provide investors with a measure of downside protection in falling markets and the potential for upside participation in rising markets. With AUM of $631.3 million, it charges 68 bps in annual fees and trades in an average daily volume of 333,000 shares.

6 Meridian Small Cap Equity ETF SIXS - Beta: 0.49

This actively managed ETF uses a quantitively-driven strategy emphasizing high-quality, small-cap stocks. Stocks are first screened to remove those that score poorly on financial and growth measures. Those stocks that pass the screen are then ranked on a stand-alone basis in relation to two factors – beta and value. The stocks that rank the highest for each factor are combined into one portfolio. Stocks that rank high in both factors are over-weighted. This strategy results in a basket of 87 stocks, charging investors 97 bps in annual fees. The product has amassed $58.9 million in its asset base and trades in paltry volume of 2,000 shares per day on average.

Pacer Trendpilot Fund of Funds ETF TRND – Beta: 0.57

This ETF follows the Pacer Trendpilot Fund of Funds Index, which seeks to implement a systematic trend-following strategy that directs exposure to 100% to the equity component; or 50% to the equity component and 50% to 3-month US Treasury bills; or 100% to 3-month US Treasury bills, depending on the relative performance of the equity Component and its 200-business day historical simple moving average. With AUM of $60.4 million, it charges 77 bps in annual fees and trades in volume of around 11,000 shares a day on average.

Bottom Line

Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability to the portfolio, protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in the current market environment and seeking outperformance.

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Invesco S&P 500 Downside Hedged ETF (PHDG): ETF Research Reports

Pacer Trendpilot Fund of Funds ETF (TRND): ETF Research Reports

Nationwide RiskManaged Income ETF (NUSI): ETF Research Reports

6 Meridian Small Cap Equity ETF (SIXS): ETF Research Reports

FT Cboe Vest Fund of Deep Buffer ETFs (BUFD): ETF Research Reports

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