5 ETF Zones to Keep Your Money Safe Amid Market Volatility

Wall Street wrapped up the first quarter with a big bang, driven by strong corporate profits, enthusiasm around AI and hopes that the Fed will cut rates.

In the latest meeting, the Fed maintained its interest rates steady in a range of 5.25%-5.50% and signaled three rate cuts this year, citing expanding economic activity and easing but elevated inflation. Lower interest rates generally lead to reduced borrowing costs, helping businesses to expand their operations more easily and resulting in increased profitability. This, in turn, will stimulate economic growth and provide a boost to the stock market.

However, the rally fizzled with the start of the second quarter as the rate cut optimism faded and tensions in the Middle East escalated. The upbeat economic data points to a stronger economy, dialing back expectations for rate cuts in the first half of this year (read: Inverse ETFs to Play Now on Middle East Tension & Rising Rates?).

Manufacturing activities unexpectedly expanded in March for the first time since September 2022, according to data by the Institute for Supply Management, on a sharp rebound in production and stronger demand. In February, new orders for the United States-manufactured goods grew more than expected, boosted by demand for machinery and commercial aircraft. Job openings, a measure of labor demand, held steady at higher levels in February. Meanwhile, consumer prices accelerated at a faster-than-expected pace in March, pushing inflation higher and dashing hopes that the Fed will be able to cut interest rates anytime soon. This has outlined the case for longer-than-expected higher rates.

Further, the tensions in the Middle East have intensified after Iran launched a barrage of missiles and drones in Israel over the weekend, heightening fears of a wider conflict in the volatile region.

The combination of factors has prompted investors to re-access their portfolios, leading to higher demand for lower-risk securities. As a result, we have highlighted five such zones and their popular ETFs where investors could stash their money amid the current turbulence.

Low Volatility - iShares MSCI USA Min Vol Factor ETF (USMV)

Low-volatility ETFs have the potential to outpace the broader market in an uncertain market environment, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to the defensive sectors that usually have a higher distribution yield than the broader markets.

While there are several options, iShares MSCI USA Min Vol Factor ETF, with AUM of $23.8 billion and an average daily volume of 3 million shares, is the most popular ETF. The fund charges 15 bps in annual fees and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

Quality - iShares MSCI USA Quality Factor ETF (QUAL)

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings.

With AUM of $42 billion, iShares MSCI USA Quality Factor ETF provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index and holds 126 stocks in its basket. The ETF charges 15 bps in annual fees and trades in an average daily volume of 1.8 million shares.

Value – Vanguard Value ETF (VTV)

Value stocks have proven to be outperformers over the long term and are less susceptible to trending markets. These stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. These have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts (read: Top-Ranked Value ETFs to Buy Amid Uncertainty Around Rate Cut).

This fund targets the value segment of the broad U.S. stock market and follows the CRSP US Large Cap Value Index. It holds 340 stocks in its basket with AUM of $113.3 billion and charges 4 bps in annual fees. The ETF trades in volume of 2.3 million shares per day on average and has a Zacks ETF Rank #2 (Buy) with a Medium risk outlook.

Dividend - Vanguard Dividend Appreciation ETF (VIG)

Dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth, like VIG, seem to be good picks. The ETF has AUM of $76.8 billion and trades in volume of 957,000 shares a day on average. It charges 6 bps in annual fees and has a Zacks ETF Rank #2 with a Medium risk outlook (read: Dividend ETFs to Consider Amid Hot Inflation Data).

Bottom Line

These products could be worthwhile for investors who have low risk tolerance. These have the potential to outperform the broad market, especially if the Israel-Iran conflict continues to heat up and uncertainty surrounding the timing of Fed rate cuts dampens investors’ sentiments.

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Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports

Vanguard Value ETF (VTV): ETF Research Reports

iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports

iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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