5 ETFs to buy to profit from market volatility

These ETFs to buy can help investors thrive in risky market settings.

  • By Todd Shriber,
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Equity market volatility is ebbing from its March highs, but amid a spate of poor economic data and expectations that the current turmoil will be the worst this year for the U.S. economy, investors don’t have a lot of margin for error when it comes to dealing with turbulence. Fortunately, there are plenty of exchange-traded funds (ETFs) to buy to stake some of the edge off if uncertainty persists and markets become shaky again.

Typically, when investors think of ETFs to buy in an effort to profit from or guard against volatility, they do one of two things. Some drift towards products, such as the iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX), that are explicitly designed to appreciate as markets become more jittery. However, as their charts confirm, volatility-based funds are themselves volatile and not suitable for all investors.

Second, and more frequently, investors buy ETFs with direct low volatility mandates, or “low vol” funds. These products aren’t, however, designed to profit from volatility. Rather, they merely, or should, perform less poorly when markets swoon.

Here are some other ETFs to buy to survive and thrive when rocky market conditions are the order of the day:

  • Invesco QQQ (QQQ)
  • AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL)
  • SPDR S&P Dividend ETF (SDY)
  • Consumer Staples Select Sector SPDR (XLP)
  • IQ S&P High Yield Low Volatility Bond ETF (HYLV)

With that in mind, let’s explore the strength behind each of these ETFs to buy.

Invesco QQQ

Expense Ratio: 0.20%, or $20 annually per $10,000 invested

On the surface, the Invesco QQQ (QQQ) may not appear to be the quintessential low-risk fund, but using the most recent bout with volatility as the starting point, the ETF, which tracks the Nasdaq-100 Index (.NDX), is proving useful to investors this year.

Yes, QQQ is known for its large combined weight to technology, communication services and consumer discretionary stocks — roughly 89% of the fund — and that would seem to imply elevated, not reduced volatility. However, QQQ’s larger holdings are cash-rich, a quality trait that’s increasingly meaningful in the current climate.

Apple (AAPL), Microsoft (MSFT), Amazon (AMZN) and Alphabet (GOOG), which combine for about 40% of QQQ, are cash-rich quality companies that can help investors ride out rough markets. Plus, the Nasdaq-100 has a history of topping rival broad market benchmarks.

“The Nasdaq-100 is heavily allocated towards top performing industries such as Technology, Consumer Services, and Health Care, which have helped the Nasdaq-100 outperform the S&P 500 (.SPX) by a wide margin between Dec. 31, 2007 and March. 31, 2020,” according to Nasdaq Global Indexes.

AGFiQ U.S. Market Neutral Anti-Beta Fund

Expense Ratio: 2.11%

Yes, the BTAL fund (BTAL) is pricey compared to the other funds on this list, but this isn’t a straight forward long only fund. Even with that above-average fee, BTAL is proving to be worth its weight in gold this year. Consider this: even with a strong April showing, the S&P 500 is still sporting a double-digit year-to-date loss, but BTAL is higher by more than 14%.

BTAL has the “potential to generate positive returns regardless of the direction of the general market, so long as low beta stocks outperform high beta stocks,” according to the issuer. In plain English, this ETF to buy profits off a spread between high and low beta names, the latter of which are usually in favor at the former’s expense in rocky markets.

BTAL is also an alternative to products such as the aforementioned VXX, dedicated low volatility ETFs and government bonds. In fact, BTAL is topping low-vol ETFs and Treasuries this year with significantly less risk than a product like VXX.

SPDR S&P Dividend ETF

Expense Ratio: 0.35%

Historically, dividends have volatility reducing capabilities, but that notion is being taken to task this year amid a spate of negative dividend action by S&P 500 member companies. Fortunately, the SPDR S&P Dividend (SDY) focuses on dividend growers, a corner of the market that’s been steady even as some payouts are shrinking.

SDY follows the S&P High Yield Dividend Aristocrats Index, which requires member firms to have minimum payout increase streaks of 20 years. Various data points confirm the benefits of investing in dividend growers for the long term.

For members of SDY’s index “earnings were double last year’s dividend payouts for the Aristocrats, vs. only 1.2x dividends for the high payers. Cash on hand was also a higher multiple of last year’s dividends,” according to S&P Dow Jones Indices. “The Aristocrats used buybacks to return cash to shareholders to a greater degree than the high payers did. Since buybacks are likely to be reduced before dividends are cut, their usage provides a larger cushion for the Aristocrats.”

Over the past three years, SDY’s annualized volatility is slightly less than that found on broad market index funds.

Consumer Staples Select Sector SPDR

Expense Ratio: 0.13%

Some sectors and the related exchange-traded funds have defensive reputations with consumer staples and the XLP ETF (XLP) is a prime example of this. In a market riddled by the novel coronavirus, XLP and rival staples ETFs are hot as consumers rush to load up on essential goods, such as paper towels, hand sanitzers and toilet paper.

Covid-19 shopping trends are proving to be boons for the likes of Clorox (CLX), Procter and Gamble (PG) and Walmart (WMT), just to name a few. To the point of reliable dividends, XLP has that trait, too, as several of its components, including PG, have already boosted payouts this year. The fund yields 3%.

Overall, consumer staples are a predictable volatility refuge, but not a perfect one, as highlighted by the fact that XLP is down this year, but far less so than the S&P 500.

IQ S&P High Yield Low Volatility Bond ETF

Expense Ratio: 0.41%

Broadly speaking, bonds are docile investments, but not free of volatility and the junk space is one of the more volatile corners of the fixed income market. The trade off is investors are compensated here with higher yields. To that end, the HYLV ETF (HYLV) lets investors have their cake and eat it, too.

The fund follows the S&P U.S. High Yield Low Volatility Corporate Bond Index. That index “is designed to measure the performance of U.S. high yield corporate bonds with potentially low volatility. The index is comprised of bonds from the S&P U.S. High Yield Corporate Bond Index and is a modified market value weighted index with a 3% cap on any single issuer,” according to S&P Dow Jones.

The index provider notes that during periods of elevated market stress, including the Covid-19 March selloff, HYLV’s underlying index outperforms more traditional rivals.

Interestingly, the March volatility for HYLV’s index wasn’t just below a standard junk bond benchmark. It was barely above that of a widely followed investment-grade index.

As of this writing, Todd Shriber did not hold a position in any of the aforementioned securities.

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