5 Low-Beta ETFs To Overcome Trade Jitters

After a short calm period, trade war fears again spooked investors leading to rough trading on Wall Street. Notably, Dow Jones fell for the fifth straight session on Jun 18 when the trade tension between the world’s top two economies flared up again (read: Renewed Trade Spat Grips Market: 6 ETF Buying Zones).

In his pledge to punish the alleged theft of U.S. intellectual property, Trump unveiled the list of Chinese goods worth $50 billion targeted for 25% tariff, leading to retaliation from China with duties of “the same scale and strength.” The initial list of $34 billion worth of Chinese products, including nuclear reactors, aircraft engines, semiconductors, and a lengthy list of industrial and agricultural machinery, will be subject to duties on Jul 6.

Trump also threatened to impose additional massive tariffs on Chinese goods unless Beijing reverses course on its own trade actions and does not change its unfair practices. In fact, he has directed a U.S. trade representative to analyze a 10% tariff on additional $200 billion worth of Chinese goods. Should China retaliate to these additional tariffs, Trump will seek even further duties on another $200 billion worth of products, a move that would intensify the fight with China into an all-out trade war.

Aside the political ills, economic fundamentals remain sound. This is especially true given the raft of upbeat data which show that the economy is piping hot. American manufacturing is enjoying a 21-month winning streak, average hourly wages have been rising with 2.7% year-over-year growth, and unemployment has dropped to 3.8%, which is the lowest level since 2000 (read: Fund Managers Bullish on America in June: 6 ETFs to Profit).

Consumer spending, which accounts for more than two-thirds of U.S. economic activity, rose the most in five months by 0.6% in April, while consumer confidence rebounded near the 18-year high in May. Per the latest survey, consumer sentiment rose to the highest level in three months early in June. U.S. retail sales also rose the most in six months in May. So clearly, all the latest data points signal acceleration in economic growth after the slowdown in the first quarter. Further, the massive $1.5-trillion tax cut will perk up the economy and save billions for corporations, boosting job growth and earnings.

Given bullish economic trends, investors may want to remain invested in the equity world but at the same time seek protection from the downside arising from the ongoing trade jitters. This could be easily achieved by investing in low-beta products.

Why Low Beta?

Beta measures the price volatility of stocks relative to the overall market. It has 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 is crumbling. Despite lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when the markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus, lag their peers.

Below we have highlighted five ETFs that could be intriguing options for investors amid the growing trade war fears. All the funds have AUM of more than $50 million, indicating their good tradability.

Invesco S&P 500 BuyWrite ETF (AX:PBP) – Beta: 0.51

This fund tracks the CBOE S&P 500 BuyWrite Index, which measures the performance of a hypothetical buy-write strategy on the S&P 500 index. This strategy includes holding a long position of the stocks on the S&P 500 and selling a succession of covered call options, each with an exercise price at or above the prevailing price level of the S&P 500 index. The fund has amassed $333.6 million in AUM and charges 75 bps in annual fees.

Pacer Trendpilot US Large Cap ETF PTLC – Beta: 0.54

This ETF follows the Pacer Trendpilot US Large Cap Index, which uses an objective, rules-based methodology to implement a systematic trend-following strategy that directs 100% exposure to the S&P 500 index, or 50% to the S&P 500 and 50% to 3-Month US Treasury bills, or 100% to 3-Month US Treasury bills, depending on the relative performance of the S&P 500 index & its 200-business day historical simple moving average. The fund has AUM of $1.1 billion and charges 60 bps in annual fees (read: Trade War Heats Up Again: ETFs & Stocks in Focus).

WBI Bull|Bear Quality 1000 ETF WBIL - Beta: 0.56

This fund is actively managed and seeks long-term capital appreciation. It has the potential for current income, while also seeks to provide protection in unfavorable market conditions. It invests in large-cap domestic and foreign securities with attractive value characteristics and prospects for financial stability. WBIL has amassed $62.6 million and charges 1.05% in annual fees.

Horizons Nasdaq 100 Covered Call ETF QYLD - Beta: 0.61

This ETF follows the CBOE NASDAQ-100 BuyWrite V2 Index, which is designed to buy a NASDAQ-100 stock index portfolio, and writing (or selling) the near-term NASDAQ-100 Index covered call option, generally on the third Friday of each month. The product has $258.1 million in AUM and an expense ratio of 0.60%.

Global X SuperDividend U.S. ETF (TO:DIV) – Beta: 0.63

This fund provides exposure to the highest-dividend yielding equity securities in the United States by tracking the INDXX SuperDividend U.S. Low Volatility Index. It has amassed $399.4 million in its asset base and charges 45 bps in fees per year from investors (read: 4 Dividend Growth ETFs to Watch as Global Dividends Top).

Bottom Line

Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability in 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 some outperformance, especially if tariff threats turn into a full-blown trade war.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>

GLBL-X SPRDV US (DIV): ETF Research Reports

PWRSH-SP5 BUYWR (PBP): ETF Research Reports

HZN-NDQ1 COV CL (QYLD): ETF Research Reports

PACR-TRDP 750 (PTLC): ETF Research Reports

WBI-LC TAC SS (WBIL): ETF Research Reports

Original post

Zacks Investment Research