Right now, investors are tired of the red indexes and coronavirus news blaring from the capital markets. While it may be difficult to tune out the news, there are some ETFs that can help mute the volatility in their portfolios.
Kyle Woodley, Senior Investing Editor at Kiplinger’s, offered up 12 different exchange-traded funds (ETFs) that are ideal in a bear market now that the Dow Jones Industrial Average has taken a market corrective turn due to the coronavirus outbreak. Here is a smidgen of the funds offered in the full article:
1. iShares Edge MSCI Min Vol USA ETF(BATS: USMV)
USMV seeks the investment results of the MSCI USA Minimum Volatility (USD) Index. The fund will invest at least 90% of its assets in the component securities of the index and may invest up to 10% of its assets in certain futures, options and swap contracts, cash and cash equivalents. The index measures the performance of large and mid-capitalization equity securities listed on stock exchanges in the U.S. that, in the aggregate, have lower volatility relative to the large- and mid-cap U.S. equity market.
“The fund starts with the top 85% (by market value) of U.S. stocks that have lower volatility compared to the rest of the market. It then weights the stocks using a multi-factor risk model,” wrote Woodley. “It goes through another level of refining via an ‘optimization tool’ that looks at the projected riskiness of securities within the index. The result, at the moment, is a portfolio of more than 200 stocks with an overall beta of 0.65. Beta is a gauge of volatility in which any score below 1 means it’s less volatile than a particular benchmark. USMV’s beta, then, indicates it’s significantly less volatile than the S&P 500.”
2. Legg Mason Low Volatility High Dividend ETF(NasdaqGM: LVHD)
LVHD seeks to track the investment results of the QS Low Volatility High Dividend Index. The fund will invest at least 80% of its net assets, plus borrowings for investment purposes, if any, in securities that compose the underlying index. The underlying index is composed of equity securities of U.S. companies with relatively high yield and low price and earnings volatility.
“LVHD starts with a universe of the 3,000 largest U.S. stocks – with a universe that large, it ends up including mid- and small-cap stocks, too,” Woodley noted. “It then screens for profitable companies that can pay “relatively high sustainable dividend yields.” It then scores those stocks higher or lower based on price and earnings volatility. Every quarter, when the fund rebalances, no stock can account for more than 2.5% of the fund, and no sector can account for more than 25%, except real estate investment trusts (REITs), which are capped at 15%.”
3. Reality Shares DIVCON Dividend Defender ETF (BATS: DFND)
DFND seeks long-term capital appreciation by tracking the performance of the Reality Shares DIVCON Dividend Defender Index. The index is designed to select the companies for a long position that have the highest probability of increasing their dividend in a 12-month period and select the companies for a short position that have the highest probability of decreasing their dividend in a 12-month period.
“DIVCON looks at all the dividend payers among Wall Street’s 1,200 largest stocks, and examines their profit growth, free cash flow (how much cash companies have left over after they meet all their obligations) and other financial metrics that speak to the health of their dividends,” Woodley wrote. “It then rates each stock based on a five-tier rating system in which DIVCON 1 means the company is at high risk for a dividend cut, and DIVCON 5 means the company is very likely to grow its dividends in the future.”
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