Markets

Trade With Low Beta Sector ETFs Ahead of Election

With just one week left to the Nov 3 election, investors are getting skittish. Soaring coronavirus cases and a stalemate in Washington over the next fiscal aid bill has also dimmed the economic growth outlook.

This is especially true given the latest data from Johns Hopkins University, which showed that the United States has set a record number of new coronavirus cases. The country reported 83,718 new cases on Oct 24 and 83,757 on Oct 23 — the maximum number of cases on a single day since Jul 16. According to NBC News' tally, two back-to-back daily records for single-day increases in U.S. cases were set on Oct 23 and Oct 22 with 79,303 and 77,640 new cases, respectively. The number of hospitalizations with COVID-19 also jumped to a two-month high (read: ETF Strategies to Play as the Coronavirus Outbreak Aggravates).

The wave of new cases sparked a sell-off in Wall Street on the Oct 26 trading session, with the S&P 500 logging its biggest daily decline in four weeks.

Against such a backdrop, Wall Street's fear gauge hit its highest in more than seven weeks. As such, investors seeking to remain invested in the equity world could consider low-beta ETFs.

Why Low Beta?

Beta measures the price volatility of stocks relative to the overall market. It has a 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.

With the help of etfdb.com, we have highlighted five low-beta ETFs from different industries that could be intriguing options for investors amid the current market turbulence. All the funds have AUM of more than $50 million, indicating their good tradability.

Utilities Select Sector SPDR XLU – Beta: 0.39

With AUM of $12.1 billion, this fund provides exposure to a small basket of 28 securities by tracking the Utilities Select Sector Index. Electric utilities takes the top spot at 62.8%, closely followed by multi utilities (31.3%). The product charges 13 bps in annual fees and sees heavy volume of around 12.2 million shares on average. It has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook (read: 4 Top ETFs, Stocks From Attractive Sectors Pre Q3 Earnings).

VanEck Vectors Video Gaming and eSports ETF ESPO – Beta: 0.52

This fund offers exposure to global companies involved in video game development, esports, and related hardware and software by tracking the MVIS Global Video Gaming and eSports Index. It holds 25 stocks in its basket with American firms accounting for nearly one-third of the portfolio, while Japan and China round off the next two with a double-digit allocation each. The fund has gathered $560.3 million in its asset base while trading in an average daily volume of 164,000 shares. It charges 55 bps in annual fees from investors (read: Video Gaming Thrives in Pandemic: 3 Top ETFs to Gain).

Consumer Staples Select Sector SPDR Fund XLP – Beta: 0.58

This is the most-popular consumer staples ETF with AUM of $13.8 billion and follows the Consumer Staples Select Sector Index. It holds about 32 securities in its basket and charges 13 bps in fees per year from investors. From an industrial look, household products and beverages take the largest share at 27.1% and 24.1%, respectively, while food & staples retailing, and food products round off the next two spots. The fund trades in heavy volume of nearly 8.5 million shares a day and has a Zacks ETF Rank #3 with a Medium risk outlook

Invesco Dynamic Food & Beverage ETF PBJ – Beta: 0.67

This product offers exposure to 32 companies engaged in the manufacture, sale or distribution of food and beverage products, agricultural products and products related to the development of new food technologies by tracking the Dynamic Food & Beverage Intellidex Index. The fund has amassed $73.4 million in its asset base, while trading in average daily volume of 15,000 shares. It charges 63 bps in annual fees from investors. This fund also has a Zacks ETF Rank #4 with a Medium risk outlook (read: August U.S. Manufacturing Best in 2 Years: 5 Solid ETF Areas).

Invesco KBW Property & Casualty Insurance ETF KBWP – Beta: 0.68

KBWP offers exposure to companies primarily engaged in U.S. property and casualty insurance activities. It follows the KBW Nasdaq Property & Casualty Index and holds 25 stocks in its basket. With AUM of $181.3 million, the fund charges 35 bps in fees per year and trades in average daily volume of 6,000 shares. It has a Zacks ETF Rank #3 with a Medium risk outlook.

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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Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
 
Utilities Select Sector SPDR ETF (XLU): ETF Research Reports
 
Invesco Dynamic Food Beverage ETF (PBJ): ETF Research Reports
 
Invesco KBW Property Casualty Insurance ETF (KBWP): ETF Research Reports
 
VanEck Vectors Video Gaming and eSports ETF (ESPO): ETF Research Reports
 
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Zacks Investment Research
 
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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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