Wall Street seems to be in a tug of war this week as trading sessions are witnessing wild intraday movements. After witnessing major swings, all the three major indices have been in the red so far for this week (ending Jan 28). Several concerns were clouding the market sentiments like the fourth-quarter earnings season, mixed economic data releases and the announcements from the Federal Reserve Open Market Committee’s meeting.
Post the meeting, Chairman Jerome Powell indicated that the first rate hike since 2018 could be seen as early as in March 2022. The Federal Reserve already started tapering the bond purchases, which it expects to complete by March this year. However, the magnitude and the month of the interest rate hike have not been clearly stated yet.
Against this backdrop, let’s take a look at some of the safe ETF options that investors can consider likeVanguard Dividend Appreciation ETF (VIG), Invesco S&P 500 Low Volatility ETF (SPLV), iShares MSCI USA Quality Factor ETF (QUAL), SPDR S&P MIDCAP 400 ETF Trust (MDY)and Vanguard Consumer Staples ETF (VDC).
Mixed economic data releases are being witnessed. According to the latest reports, the U.S. economy grew an annualized 6.9% in the fourth quarter of 2021, surpassing expectations of 5.5%, following a 2.3% uptick in the previous three-month period. For 2021, the economy advanced 5.7%, the highest since 1984, per trading economics.
In this regard, Mike Reynolds, vice president of investment strategy at Glenmede mentioned that “The Q4 GDP report was a nice upside surprise in a string of recently underwhelming economic data points,” according to a CNBC article.
The release of certain disappointing economic data releases is also raising concerns. For starters, the latest data on U.S. industrial output appears disappointing as aggravating COVID-19 cases from the Omicron variant affect the recovering U.S. economy. Per the Fed’s recently released data, total industrial production dipped 0.1% last December. A 0.3% decline in the manufacturing output came against a revised rise of 0.6% in November. There was a 1.5% fall in utility production. Mining production witnessed a 2% gain, mainly on strength in the oil and gas sector.
U.S. retail sales also slid 1.9%, sequentially, in December, marking the steepest fall since February 2021 and ending four successive months of strong growth.
Moreover, consumers seem to be losing their enthusiasm about the recoveries in the labor market and an improving U.S. economy from the pandemic-led slowdown. The Conference Board's measure of consumer confidence index stands at 113.8 in January 2022, lagging the downwardly revised reading of 115.2 in December 2021. However, January’s reading surpassed the consensus estimate of the metric, coming in at 111.2, per a Bloomberg poll. The metric continues to be below the pre-pandemic level of 132.6, hit in February 2020.
Also, the ISM Manufacturing PMI in the United States slid to 58.7 in December 2021 from 61.1 in November, lagging market forecasts of 60. The reading highlighted weakest growth in factory activity since January due to softness in new orders’ growth. The latest jobs report for last December looks disappointing. The U.S. economy added 199,000 jobs in December 2021, lagging market estimates of 400,000.
Defensive ETFs in Focus
Given the current market conditions,we highlighted some ETFs like:
Vanguard Dividend Appreciation ETF VIG
Dividend aristocrats are blue-chip dividend-paying companies with a long history of increasing dividend payments year over year. Moreover, dividend aristocrat funds provide investors with dividend growth opportunities compared to other products in the space but might not necessarily have the highest yields. These products also form a strong portfolio, with a higher scope of capital appreciation against simple dividend-paying stocks or those with high yields. As a result, these products deliver a nice combination of annual dividend growth and capital-appreciation opportunity and are mostly good for risk-averse long-term investors.
Vanguard Dividend Appreciation ETF is the largest and the most popular ETF in the dividend space, with AUM of $63.97 billion. VIG follows the S&P U.S. Dividend Growers Index. Vanguard Dividend Appreciation ETF charges 6 basis points (bps) in annual fees (read: 5 Top-Ranked ETFs to Add to Your Portfolio for 2022).
Invesco S&P 500 Low Volatility ETF SPLV
Demand for funds with “low volatility” or “minimum volatility” generally increases during tumultuous times. These seemingly-safe products usually do not surge in bull market conditions but offer more protection than the unpredictable ones. These funds are less cyclical, providing more stable cash flow than the overall market.
Invesco S&P 500 Low Volatility ETF has been providing exposure to stocks with the lowest realized volatility over the past 12 months. The fund is based on the S&P 500 Low Volatility Index and holds 102 securities in its basket. Invesco S&P 500 Low Volatility ETF hasAUM of $9.14 billion and charges an expense ratio of 25 bps, as stated in the prospectus (read: Here's Why it Makes Sense to Invest in Low-Volatility ETFs Now).
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 and high margins. These stocks also have a track record of stable or increasing sales and earnings growth. Compared to plain vanilla funds, these products help lower volatility and perform better during market uncertainty. Further, academic research has proven that high-quality companies constantly provide better risk-adjusted returns than the broader market over the long term.
iShares MSCI USA Quality Factor ETF provides exposure to the 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. With AUM of $22.06 billion, QUAL charges 0.15% of fees (read: Quality ETFs Appear Attractive as Fed Rate Hike Nears).
SPDR S&P MIDCAP 400 ETF Trust MDY
Considering the mixed sentiments, mid-cap funds are gaining attention as they provide both growth and stability compared to their small-cap and large-cap counterparts. Investors seeking to capitalize on the strong fundamentals but are worried about uncertainties should consider the mid-cap ETFs.
SPDR S&P MIDCAP 400 ETF Trust seeks to provide investment results that, before expenses, correspond generally to the price and the yield performance of the S&P MidCap 400 Index. MDY has AUM of $19.42 billion. SPDR S&P MIDCAP 400 ETF Trust charges a fee of 23 bps (see: all the Mid Cap ETFs here).
Vanguard Consumer Staples ETF VDC
The consumer staples sector is known for its non-cyclical nature and acts as a safe haven during unstable market conditions. Moreover, like utility, consumer staples is considered a stable sector for the long term as its players are likely to offer decent returns. During an economic recession, investors can consider parking their money in the non-cyclical consumer staples sector. This high-quality sector, which is largely defensive, is found to have a low correlation factor with economic cycles.
Vanguard Consumer Staples ETF seeks to track the performance of the MSCI US Investable Market Consumer Staples 25/50 Index. With AUM of $6.58 billion, VDC has an expense ratio of 10 bps.
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Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
SPDR S&P MidCap 400 ETF (MDY): ETF Research Reports
iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
Invesco S&P 500 Low Volatility ETF (SPLV): ETF Research Reports
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