ETF Strategies to Mark as Covid-19 Flares up Recession Scares

Sweta Jaiswal, FRM

The coronavirus outbreak has spread to around 37 countries, claiming 2,765 lives along with 81,018 confirmed cases. The spike in the number of infected cases outside mainland China has made the outbreak a serious threat to global economic growth. South Korea is grappling with the rising Covid-19 cases, which have now reached 1,146. Meanwhile, Italy, which was already struggling with a weak economy, has witnessed a spike in the infected cases to 325. Italy’s economy shrank 0.3% sequentially in the final quarter of 2019. In fact, the country was expected to hit recession in early-2020.

Meanwhile, the world’s third-largest economy, Japan, is moving toward a technical recession this year as its economy contracted by an annualized 6.3% during the last quarter of 2019. The decline was much steeper than the median market projection of a 3.7% fall. Notably, the economy saw the steepest decline in GDP since the second quarter of 2014. As Japan’s economy has been struggling hard, the coronavirus outbreak has been posing a serious threat. The virus impact is likely to push the economy into recession in first-quarter 2020 (read: Tough Time for Japan ETFs? COVID-19 Alone Isn't the Culprit).

The current global economic scenario is no consolation as well. Four of the world’s top 12 economies, which account for about 27% of global GDP, are struggling to contain the outbreak. Germany (one of the top 12) is also close to slipping into recession.

Smaller economies like Hong Kong, Singapore, Indonesia, Thailand and Malaysia are not doing well either. Recently, Thailand slashed its growth outlook for this year as its tourism-dependent economy was hit by the rapid spread of coronavirus. Moreover, fourth-quarter 2019 GDP growth in Indonesia touched a three-year low whereas Malaysia reported the weakest reading in a decade.

Going on, Goldman Sachs recently trimmed the economic growth forecast for the world’s largest economy for the first quarter of 2020 to 1.2% from 1.4% due to aggravating coronavirus concerns. The current GDP projections compare unfavorably with the 2.1% rise in fourth-quarter 2019 economic growth and 2.3% rise in 2019.

Rightfully summed up, Diane Swonk, chief economist at Grant Thornton, says, “it may not be called a health pandemic yet but it is an economic pandemic."

ETF Strategies to Follow

Given the situation, let’s look at some ETF strategies that investors can follow for a smooth sail in these turbulent times.

Dividend ETFs

In a low-interest rate environment, dividend investing becomes the hot spot. Against this backdrop, dividend ETFs like WisdomTree U.S. Quality Dividend Growth Fund DGRW, FlexShares Quality Dividend Defensive Index Fund QDEF, WBI Power Factor High Dividend ETF WBIY and Schwab US Dividend Equity ETF SCHD might be compelling picks (read: 7 Dividend ETFs That Offer Growth in 2020).

Low-Volatility ETFs

Demand for funds with “low volatility” or “minimum volatility” generally increases during tumultuous times. These seemingly-safe products generally do not surge in bull market conditions but offer protection against unpredictable conditions. Providing more stable cash flow than the overall market, these funds are less cyclical in nature. Here are some options, iShares Edge MSCI Min Vol USA ETF USMV, Invesco S&P 500 Low Volatility ETF SPLV, iShares Edge MSCI EAFE Minimum Volatility ETF EFAV, iShares Edge MSCI Min Vol Global ETF ACWV, Invesco S&P 500 High Dividend Low Volatility ETF SPHD (read: Is it the Right Time to Buy Global Low-Volatility ETFs?).

Treasury Bond ETFs

Notably, the 30-year Treasury yield declined to a record low level on Feb 21. The declining yields were a result of investors’ flight for safety to bonds, as concerns over slowing global economic growth due to the coronavirus outbreak started escalating. Thus, investors can consider iShares 20+ Year Treasury Bond ETF TLT, 25+ Year Zero Coupon U.S. Treasury Index Fund ZROZ  and Vanguard Extended Duration Treasury ETF EDV (read: 10 Most Heavily Traded ETFs of 2019).

REIT ETFs

Real estate investment trusts (REITs) have had a good run on the bourses in 2019. A dovish Fed can be cited as the main driving factor. When interest rates drop, mortgage rates fall, making real estate or refinancing mortgages affordable. This in turn boosts real estate sales. These funds offer outsized yields and act as good investing options when increased safe-haven trades keep yields at check. In view of this, investors can consider ETFs like JPMorgan BetaBuilders MSCI US REIT ETF BBRE, iShares Core U.S. REIT ETF USRT, Nuveen Short-Term REIT ETF NURE, Invesco S&P 500 Equal Weight Real Estate ETF EWRE and Schwab U.S. REIT ETF SCHH  (read: REIT ETFs to Gain as Mortgage Rates Dip to 3.5-Year Low).

Precious Metals ETFs

Prices of precious metals like gold and silver rise during chaotic market conditions. This enhances the appeal of iShares Silver Trust SLV, Invesco DB Silver Fund DBS, SPDR Gold Trust ETF GLD, iShares Gold Trust IAU  and Aberdeen Standard Physical Palladium Shares ETF PALL (read: Palladium ETF Continues to Surge in 2020: What Lies Ahead?).

Utility ETFs

The rising tensions are causing investors to seek refuge in safer investment options, with the utility sector hogging major attention. The sector is among the most stable for the long term as its players are likely to offer decent returns, irrespective of market conditions. It is known for its non-cyclical nature and acts as a safe haven for investors during erratic stock market conditions. Moreover, utilities act as a defensive option to stay invested in more rewarding equity markets. In view of this, investors can consider The Utilities Select Sector SPDR Fund XLU, Vanguard Utilities ETF VPU, iShares U.S. Utilities ETF IDU and Fidelity MSCI Utilities Index ETF FUTY (read: ETFs to Buy as Utilities Are Favored Amid Virus Scare).

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Click to get this free report iShares 20+ Year Treasury Bond ETF (TLT): ETF Research Reports SPDR Gold Shares (GLD): ETF Research Reports iShares Gold Trust (IAU): ETF Research Reports Utilities Select Sector SPDR ETF (XLU): ETF Research Reports iShares Silver Trust (SLV): ETF Research Reports Vanguard Utilities ETF (VPU): ETF Research Reports iShares Edge MSCI Min Vol USA ETF (USMV): ETF Research Reports Fidelity MSCI Utilities Index ETF (FUTY): ETF Research Reports Invesco DB Silver ETF (DBS): ETF Research Reports Schwab U.S. REIT ETF (SCHH): ETF Research Reports WisdomTree U.S. Quality Dividend Growth ETF (DGRW): ETF Research Reports PIMCO 25+ Year Zero Coupon U.S. Treasury Index ETF (ZROZ): ETF Research Reports Vanguard Extended Duration Treasury ETF (EDV): ETF Research Reports Invesco S&P 500 High Dividend Low Volatility ETF (SPHD): ETF Research Reports To read this article on Zacks.com click here. Zacks Investment Research Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report