It is out there looming, stalking, waiting to pounce. It being
the fiscal cliff, the highly undesirable situation under which
expiring tax cuts are not renewed (in essence becoming tax hikes)
and are met with spending reductions by the affected
government.
The U.S. is facing such a scenario and the result could be the
loss of $600 billion, or four percent of GDP. More than a few
analysts believe that type of haircut will be enough to send the
world's largest economy tumbling to another recession. The
spending reductions could be a long-term positive, but the impact
of those cuts will be muted in the near-term as markets and
investors react to the loss of stimulative tax cuts.
Not surprisingly, plenty of ETFs could
prove vulnerable to the fiscal cliff
. From discretionary and retail ETFs to funds tracking sectors
highly dependent on government spending to those offering
exposure to industrial commodities, there is no shortage of ETFs
that could be hit by the fiscal cliff.
This is one of those times when failure to prepare is
preparing to fail. With that old adage in mind, here are some
ETFs investors can use to weather the fiscal's cliff storm.
PowerShares S&P 500 Low Volatility Portfolio (NYSE:
SPLV
)
It is safe to say that any region, sector or theme that is or is
perceived to be high on beta and volatility will be savagely
repudiated due to the fiscal cliff. Moving the opposite direction
from high volatility ETFs, investors can find their way to SPLV,
the
the king of the low volatility ETF arena
.
The fiscal cliff also has the potential to pressure those
sectors that are highly correlated to the broader market's whims,
so it would behoove investors to pass on those groups.
Fortunately, SPLV devotes a combined 60 percent of its weight to
consumer staples and utilities names and those two sectors are
among the least correlated to the S&P 500.
iShares iBoxx $ Investment Grade Corporate Bond Fund
(NYSE:
LQD
)
One obvious impact of the fiscal cliff is that it will likely
erode risk appetite, spelling bad news for junk bond ETFs in the
process. While desire for yield may not diminish much during the
fiscal cliff, risk appetite certainly will. That would hamper
gains for junk bond ETFs, an asset class where some would argue
the easy money has already been made
.
Bond investors looking for the combination of conservative
positions and yields above what Treasuries offer could be all but
forced to consider high-grade corporates. LQD's 30-day SEC yield
is just 2.76 percent, but income investors can find some level of
comfort in this ETF because it does pay a monthly dividend.
PowerShares Emerging Markets Sovereign Debt Portfolio
(NYSE:
PCY
)
Some so-called experts have argued that amazing ascent of the
PowerShares Emerging Markets Sovereign Debt Portfolio and rival
funds such as the iShares J.P. Morgan USD Emerging Markets Bond
Fund (NYSE:
EMB
) in 2012 has been fueled by the Fed's low interest rate policy,
which has encouraged higher risk appetite.
That argument is easily refuted by the fact that PCY's
holdings are dollar-denominated and quantitative easing is seen
as damaging to the dollar. Rather,
improving emerging markets balance sheets
and credit ratings have boosted PCY, and that is a scenario that
can continue regardless of the fiscal cliff happening in the U.S.
Over the past three years, PCY's correlation to the S&P 500
is just 0.68.
Those wanting to part ways with the dollar can opt for the
WisdomTree Emerging Markets Local Debt ETF (NYSE:
ELD
). That actively managed product's holdings are denominated in
local currencies.
For more on ETFs and the fiscal cliff, click
here
.
(c) 2012 Benzinga.com. Benzinga does not provide investment
advice. All rights reserved.