Endure Market Volatility with These ETFs

The U.S. stock market has been performing pretty strongly since the U.S. economy returned to the growth path in Q2 posting about 4% growth. Most of economic indicators released recently, be it consumer confidence, manufacturing, inflation and jobless data, were upbeat and the S&P soared crossing the 2,000 mark for the first time.

The global stock markets will keep receiving incessant flows of cheap money thanks to the continuation of super accommodative policies in Japan, mini stimulus in China and the expected initiation of QE in the Euro zone. But a faster-than-expected hike in interest rates in the U.S., once the procedure begins, may restrain the stock market rally, at least for the short term.

Investors should note that the Fed is just one month away from leaving the QE era which started in 2008. While the Fed cut its QE stimulus by another $10 billion this month, its dovish commitment to keep the interest rates at a rock-bottom level for a ’considerable time’ is still adding cheer to the stock markets.

Investors normally take ‘considerable time’ to mean about 6 months, though the Fed has never mentioned it in any official dialogue. Fed officials increased their median estimate for the key interest rate at the end of 2015 to 1.375% from 1.125% projected in June, per Bloomberg. Whatever the case, investors might see a short-term sell-off once the Fed hikes interest rate with rate sensitive sectors and high momentum stocks being hit hard.

It was not too late, in fact only in June, when the Fed raised concerns of stretched valuations over some sectors like biotech, social media and small-cap stocks. The Fed also sounded worried over the valuation of the leveraged loan market too.

Though the U.S. economy gained enough strength, the global economy is far from standing on its own feet due to new concerns in Europe, geopolitical issues, and the emerging market slowdown (read: The Fed's Valuation Concerns Put These Growth ETFs in Focus).

If this was not enough, the International Monetary Fund (:IMF) recently expressed concerns over investors’ extreme risk taking activities. Per IMF, growth is yet to be full-fledged and investors are undervaluing the risk quotient in the market. IMF sees overvaluation in most asset classes against past standards.

In such a situation, it might be prudent for investors to reallocate their portfolios to low risk products. Below, we have highlighted three ETFs that investors could consider in their portfolios if the stock market continues to experience volatility (read: Hedge Your Portfolio with Low Volatility ETFs).

MSCI USA Minimum Volatility ETF (USMV)

This fund tracks the MSCI USA Minimum Volatility index providing exposure to low volatility stocks of the U.S. The product has managed asset base of $2.79 billion while trades in decent volume of more than 3,500,000 shares a day. Expense ratio comes in at 0.15%.

Holding 154 stocks, the fund is widely spread out across each sector and security. None of the securities holds more than 1.54%, while healthcare, IT and consumer staples and financials occupy the top four positions in terms of sector with double-digit allocations.

PowerShares S&P 500 Low Volatility Portfolio ETF (SPLV)

This ETF provides exposure to 100 U.S. stocks with the lowest realized volatility over the past 12 months by tracking the S&P 500 Low Volatility Index. The fund is widely spread across a number of securities and none of these hold more than 1.27% of assets (read: Buy These ETFs for Higher Returns and Lower Risk).

However, the product has a tilt toward financials at nearly 23.7% share while utilities, consumer staples and industrials round off the top five. SPLV is the largest and the most popular ETF in the low volatility space with AUM of $4.59 billion and average daily volume of around 850,000 shares. The fund charges 25 bps in annual fees.

PowerShares S&P 500 High Dividend Portfolio ETF (SPHD)

This fund follows the S&P 500 Low Volatility High Dividend Index, which includes U.S. stocks that historically provided high dividend yields and low volatility. The ETF holds 50 stocks in its basket and each security holds not more than 3.17% of assets. Sector-wise also, the fund is well diversified (read: Are There Really High-Dividend, Low-Risk ETFs?).

Here, utilities take the top spot from a sector look with around 18.34% share, closely followed by consumer staples (18.03%) and financials (16.21%). The product has amassed $175.2 million in its asset base while volume is also light. It charges 30 bps in annual fees from investors while it has an attractive dividend yield of 3.47%.

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