If the best offense is indeed a good defense, then investors can apply that rule to the ETF market and cushion themselves from the hail of volatility that has been pounding the capital markets as a result of the coronavirus outbreak. While the default maneuver is to snatch up safe haven assets like precious metals, another way is seeking certain sectors like communications.
Gold and safe haven sectors can help mute the effects of sharp market downturns like the stomach-churning drops in the Dow Jones Industrial Average the past couple of days. Sounds well and good, but what’s an investor to do at this point, especially when the threat of a global pandemic is casting such a gloomy shadow over the markets?
Dave Nadig, chief investment officer and director of research at ETF Database, offered a couple of suggestions.
“There are really two strategies here. One is to reposition and one is to hedge,” Nadig said in an interview with CNBC on the “ETF Edge” show. “If you’re looking to hedge, I find the things that are going to go up when the market continues to go down.”
As aforementioned with respect to precious metals, Nadig guided investors towards the light—in this case, the shine of gold with funds like the like SPDR Gold Shares (NYSEArca: GLD). However, safety can also be had via certain sectors.
“I think it’s more interesting, though, to think about other ways of staying in the market to stay invested,” Nadig said. “That can mean something as simple as looking at sectors of the market that may be a little immune to an ongoing concern about supply lines and all of that.”
Nadig suggests investors give Communication Services Select Sector SPDR Fund (XLC) a peep. The fund seeks to correspond generally to the price and yield performance of publicly traded equity securities of companies in the Communication Services Select Sector Index, which includes securities of companies from the following industries: diversified telecommunication services; wireless telecommunication services; media; entertainment; and interactive media & services.
“I like the communications sector here. … It’s taken a big hit from Facebook,” which together with Alphabet accounts for roughly 43% of the XLC’s portfolio”, he said. “It’s very concentrated, but you’re also picking up Disney and Netflix and names that I think will be much more immune to a protracted downturn.”
Nadig did warn that investors shouldn’t simply buy the dip, especially when it comes to big name tech stocks that have been leading the extended bull rally the past decade. The latest drop could signal more weakness to come and investors don’t want to catch a falling knife.
“I would not necessarily be looking at this as the opportunity to start buying high-flying tech stocks again just because they’re down a couple percent,” he said. “Remember, these are the prices we just saw a couple of weeks ago. It may feel like a big correction right now, but, really, it’s just a two-week Groundhog Day.”
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