5 Low-Risk Etfs For Cautious Investors
Wall Street’s 2017 steaming rally evaporated this year on rising rate and overvaluation concerns. Increasing inflationary expectations and the accompanied surge in Treasury bond yields weighed on the stock market.
Added to this was rising trade war fears that President Trump initiated with his announcement of tariffs on steel and aluminum imports. He is also planning to levy another tariff on Chinese imports. No wonder, the S&P 500 is up just 0.8% this year (as of Mar 20, 2018) and the Dow Jones Industrial Average is down 0.4% (read: 3 ETF Areas Up At Least 15% This Year).
Bank of America Merrill Lynch Fund Manager Survey now sees trade war as the key risk to the broader market rally, per CNBC. As many as 30% of respondents are spooked by trade fears, while inflationary worries took the second spot with 23% votes followed by global growth (thanks to Brexit) taking 16%. The BofAML survey found out that about 87% of fund managers believe that protectionism would increase inflation and stagflation.
Are Investors Largely Cautious?
In any case, the current bull market is also called the ‘Most-Hated’ bull market ever. Most market watchers appear ‘cautiously optimistic’ about the Wall Street rally, if we go by an article published on Wall Street Journal (read: What Makes Value ETFs a Winner in the 9-Year Bull Market?).
SPDR S&P 500 ETF , iShares Russell 2000 ETF and Powershares Nasdaq 100 ETF had top short interest balances worth $53,908, $13,371 and $10,123 as of Mar 16, 2018. Notably, “a short interest is the quantity of stock shares that investors have sold short but not yet covered or closed out,” indicating pessimism toward the market.
"Cracks in the bull case are starting to emerge, with fund managers citing concerns over trade, stagflation and leverage," said Michael Hartnett, chief investment strategist at BofAML, though optimism around strong corporate earnings can’t be ruled out. About 58% respondents expect global earnings per share to surge more than 10% in the coming 12 months.
Meanwhile, the Fed enacted its first rate hike of the year and offered a bullish guidance for the U.S. economy. Though the move was already a done-deal, ruling out exaggeration in market reaction, we can see some volatile trading in the coming days. Investors might be looking for directions in the stock and bond market.
These Low Risk ETFs Could be Useful
Below we highlight a few low risk ETFs that could help investors unnerved by trade war fears and inflationary threats.
First Trust Horizon MgdVolatil Domestic ETF
This actively managed fund is spread out among sectors and stocks. No stock accounts for more than 2.67% of the portfolio while no sector makes up more than 16.52% of the basket.
FormulaFolios Hedged Growth ETF
The Formula Folios Hedged Growth ETF seeks to achieve capital growth by investing in domestic equity securities of various market caps, with the ability to hedge using US Treasuries and inverse market positions through other unaffiliated exchange traded funds.
iShares Edge MSCI Min Vol USA Small-Cap ETF
The fund gives exposure to small-cap stocks that have lower volatility features. The fund is spread across various sectors. No stock makes up more than 1.19% of the fund.
SPDR SSGA US Small Cap Low Volatility Index ETF
This fund also tracks the performance of U.S. small capitalization companies that exhibit low volatility. The fund is heavy on Financial Services (43.25%) followed by Producers Durables (14.4%).
VictoryShares US Discovery Enhanced Volatility Weighted ETF
The underlying CEMP U.S. Small Cap 500 Long/Cash Volatility Weighted Index represents the broad U.S. Small Cap stock market and looks to hedge downside risk.