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Low-Beta ETFs to Fend Off Market Volatility

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U.S. stocks have been caught in a wild swing of trading lately driven by a combination of factors like the resurgence in COVID-19 infections, inflation fears, and Fed’s taper talks.

Investors may want to remain invested in the equity world but at the same time seek protection from a downside. This could be easily achieved by investing in low-beta products like Invesco S&P 500 Downside Hedged ETF PHDG, Nationwide Nasdaq-100 Risk-Managed Income ETF NUSI, Pacer Trendpilot Fund of Funds ETF TRND, The Core Alternative ETF CCOR and JPMorgan Equity Premium Income ETF JEPI. These funds could be intriguing options for investors amid the current market turbulence.

The spread of Omicron, has sparked fears of restriction measures and another wave of lockdown. This will dampen economic growth, which is recovering from the pandemic lows. Meanwhile, Federal Reserve Chair Jerome Powell signaled that the central bank is planning to accelerate the withdrawal of its bond-buying program at its December meeting to combat a surge in inflation (read: Sail Through Omicron-Induced Market Volatility With These ETFs).

Additionally, consumer confidence dropped to a nine-month low in November, according to the Conference Board, amid worries about the rising cost of living and resurgence in the pandemic. U.S. households have been grappling with soaring prices this year, as businesses are passing a portion of the price increases on to consumers due to labor and raw material shortages.
 
However, the economy has rebounded strongly and growth is currently near the pre-pandemic levels after shrinking 30% in the first six months of 2020. Confidence among the large U.S. companies jumped to an all-time high as indicated by the solid manufacturing data. Manufacturing activity grew at a faster pace in November with producers trying to keep up with demand amid the ongoing supply shortages and delays. The manufacturing sector recorded 18 straight months of growth going back to the spring of 2020 when the pandemic broke out.

Why Low Beta?

Beta measures the price volatility of stocks relative to the overall market. It has direct relationship to market movements. A beta of 1 indicates that the price of the stock or fund tends to move with the broader market. A beta of more than 1 indicates that the price tends to move higher than the broader market and is extremely volatile while a beta of less than 1 indicates that the price of the stock or fund is less volatile than the market.

That said, low-beta products exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market crumbles. Given lesser risks and lower returns, these are considered safe and resilient amid uncertainty. However, when markets soar, these low-beta funds experience lesser gains than the broader market counterparts and thus lag their peers.

All the above-mentioned funds offer broad exposure to a number of sectors and have AUM of more than $50 million, indicating their good tradability.

Invesco S&P 500 Downside Hedged ETF (PHDG) – Beta: 0.33

Invesco S&P 500 Downside Hedged ETF is an actively managed fund and seeks to deliver positive returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns. Invesco S&P 500 Downside Hedged ETF tries to follow the S&P 500 Dynamic VEQTOR Index, which provides broad equity market exposure with an implied volatility hedge by dynamically allocating between different asset classes: equity, volatility and cash. The index allows investors to receive exposure to the equity and volatility of the S&P 500 Index in a dynamic framework (read: 4 Defensive ETFs to Play the Post-Thanksgiving Market Crash).

Invesco S&P 500 Downside Hedged ETF has accumulated $299 million in its asset base and charges 40 bps in fees per year from its investors. Volume is good, exchanging 70,000 shares a day on average.

Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI) – Beta: 0.44

Nationwide Nasdaq-100 Risk-Managed Income ETF targets high income with lower risk as it uses a rules-based options trading strategy. It is designed for income-focused investors seeking to lower their exposure to market volatility and minimize the potential for losses during down markets.

With AUM of $855.2 million, Nationwide Nasdaq-100 Risk-Managed Income ETF charges 68 bps in annual fees and trades in an average daily volume of 477,000 shares.

Pacer Trendpilot Fund of Funds ETF (TRND) – Beta: 0.57

Pacer Trendpilot Fund of Funds ETF follows the Pacer Trendpilot Fund of Funds Index, which seeks to implement a systematic trend-following strategy that directs exposure to 100% to the equity component; or 50% to the equity component and 50% to 3-month US Treasury bills; or 100% to 3-month US Treasury bills, depending on the relative performance of the equity Component and its 200-business day historical simple moving average.

Pacer Trendpilot Fund of Funds ETF has amassed $66.2 million and charges 77 bps in annual fees. It trades in volume of around 7,000 shares a day on average.

The Core Alternative ETF (CCOR) – Beta: 0.64

The Core Alternative ETF is an actively managed ETF aims to produce capital gains while reducing risk exposure across market conditions. It invests primarily in U.S. equities, specifically focusing on high-quality companies across all industries and sectors that have prospects for long-term total returns as a result of their ability to grow earnings and willingness to increase
dividends over time.

The Core Alternative ETF holds 50 securities in its basket and charges a high expense ratio of 1.07%. CCOR has accumulated $241.1 million in its asset base and trades in a lower volume of 25,000 shares.

JPMorgan Equity Premium Income ETF (JEPI) – Beta: 0.64

JPMorgan Equity Premium Income ETF seeks to provide current income while maintaining prospects for capital appreciation. It generates income through a combination of selling options and investing in U.S. large-cap stocks, seeking to deliver a monthly income stream from associated option premiums and stock dividends (read: Low-Volatility ETFs in Focus on Virus & Fed Taper Worries).

JPMorgan Equity Premium Income ETF has AUM of $4.9 billion and charges 35 bps in annual fees. The product trades in an average daily volume of 891,000 shares.

Bottom Line

Investors should note that these products are not meant for generating outsized returns. Instead, these provide stability to the portfolio, protecting the initial investment. In particular, these products could be worthwhile for low risk-tolerant investors looking to safeguard their portfolio in the current market environment and seeking outperformance.


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Invesco S&P 500 Downside Hedged ETF (PHDG): ETF Research Reports
 
Core Alternative ETF (CCOR): ETF Research Reports
 
Pacer Trendpilot Fund of Funds ETF (TRND): ETF Research Reports
 
Nationwide RiskManaged Income ETF (NUSI): ETF Research Reports
 
JPMorgan Equity Premium Income ETF (JEPI): ETF Research Reports
 
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Zacks Investment Research

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