Nasdaq in Correction: ETF Strategies to Play

The Nasdaq, heavy on technology and growth stocks, is now off 10% from its November record, ensuring the fact that it has entered a correction territory. The Nasdaq Composite has lost 8% this year as investors continue to walk out of the high-growth tech shares as interest rates surge to start the new year.

There are heightened rising rate worries as the Fed is expected to hike rates in March to contain a sky-high inflation. Investors are wagering on 89.9% chances of a 25-bp interest rate hike in March, according to CME Group's (NASDAQ:CME) FedWatch Tool, and a 48.4% chance that rates will rise again by 25 bps in May and 43.9% probability that the rates will hover around 75-100 bps after the Fed’s June meeting. About 45.1% believe that 75-100 bps of rates will be seen after the meeting in July. If this happens, there will be three Fed rate hikes in the coming six months (read: Bet on Inverse Treasury ETFs Now to Play Rise in Yields ).

President Joe Biden also said he favors Federal Reserve Chairman Jerome Powell’s expected move to start tightening monetary policy. Benchmark U.S. treasury yield jumped to 1.87% on Jan 18, 2022 (this year’s high so far) from 1.63% from the start of the month. No wonder, high-growth stocks will take a beating. Growth stocks’ valuations swelled during the pandemic thanks to ultra-easy monetary policies.

Since the growth sector relies on easy borrowing for superior growth and its value depends heavily on future earnings, a rise in long-term yields cuts the present value of companies’ future earnings. Apart from the rate issues, the economic reopening amid vaccination and the easing Omicron concerns have been leading investors away from stay-at-home tech stocks.

Against this backdrop, below we highlight a few ETF strategies that could be intriguing right now.

h3 Short Nasdaq/h3

Given the sluggish backdrop, bearish investors may want to go near-term short on the Nasdaq- 100 Index. ProShares UltraPro Short QQQ SQQQ , ProShares Short QQQ (PSQ) and ProShares UltraShort QQQ (QID) are some of options to play around.

While the strategy is highly beneficial for short-term traders, it could lead to huge losses compared with traditional funds in fluctuating markets. Further, their performance could vary significantly from the actual performance of the underlying index over the longer period compared to a shorter period (such as, weeks or months).

h3 Play Value ETFs/h3

Value stocks have fared way better than growth and momentum stocks this year. SPDR Portfolio S&P 500 Value ETF SPYG and 8.8% decline in iShares MSCI USA Momentum Factor ETF (MTUM). Value stocks perform better in a low-rate environment. The favorable operating backdrop and damn cheap valuation are leading value stocks higher.

h3 Consumer Staples ETFs: A Better Bet?/h3

U.S. consumers are feeling the heat of continuously rising inflation levels. The latest disappointing preliminary consumer sentiment readings for early January that have slipped to the second-lowest level in a decade speaks of the same. The University of Michigan’s preliminary consumer sentiment declined to 68.8 in early January from 70.6 last month.

The metric lagged the market forecast of a fall to 70.0, per the Reuters survey on economists. It means that consumer discretionary stocks may be out of favor for some time now and consumer staples stocks should continue to win as these are essentials and non-cyclical in nature. Vanguard Consumer Staples ETF SDOG , which is designed to measure of the performance of U.S. large-cap equities with above-average dividend yields is a good bet right now. It yields 3.48% annually. SDOG is up 3.5% this year.

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Written By: Zacks Investment Research