The S&P 500-based (SPY – Free Report) lost 5.3% in just past two days (as of Oct 11, 2018), Dow Jones Industrial Average-based (DIA – Free Report) slid about 5.3%, iShares MSCI Emerging Markets ETF (EEM – Free Report) slipped about 4%, Vanguard FTSE Europe ETF (VGK – Free Report) fell 3.2%, iShares MSCI Japan ETF (EWJ – Free Report) shed about 4.2% and all-world ETF iShares MSCI ACWI (ACWI – Free Report) retreated about 4.5%.
The year 2018 has been all about rising rates. Though trade tensions keep a check on the fast rise of U.S. treasury yields in the July-August period, yields started trending higher starting mid-September. Benchmark U.S. Treasury yield was 3.22% on Oct 10, up from 2.46% recorded at the start of the year.
As the U.S. economy is on a strong path, the Fed has adopted a hawkish stance. If the Fed enacts faster-than-expected rate hikes in the coming days, rates will go higher. The gradual end of cheap money era led to a huge selloff in the equity market. Investors should also note that if inflation keeps rising along with U.S. economic growth, the real return of an asset will decline.
To add to the woes, the International Monetary Fund (IMF) lowered its global growth forecasts on concerns between the United States and its trading partners. The IMF now expects the global economy to expand 3.7% this year and next — down 0.2 percentage points from the previous forecast (read: IMF Cuts Global Growth Forecast: ETFs in Focus).
In short, rising rates and tariff threats’ effect on global growth have been a threat to the U.S. equity market. To circumvent the expected equity market weakness, investors may increase their exposure to long/short ETFs. Below we highlight a few of these that may beat the recent market blues.
Investors who want to shift focus to low-beta stocks during this uncertain market environment can consider adding BTAL ETF to their portfolio. This fund follows the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index which is an equal weighted, dollar neutral, sector neutral benchmark. The index identifies the lowest beta stocks and goes long on them, while at the same time going short on the highest beta stocks. The fund charges 75 bps in fees.
The underlying ISE High Income Index comprises 30 closed-end funds (CEFs) ranked highest overall by the ISE in three criteria namely fund yield, discount to net asset value and liquidity. The fund yields about 8.81% annually (read: Earn 5% Plus Yield With These ETFs).
The underlying Wells Fargo Hybrid and Preferred Securities Floating and Variable Rate Index tracks the performance of preferred stock, as well as certain types of hybrid securities that are functionally equivalent to preferred stock and that pay a floating or variable rate dividend or coupon. It yields 4.74% annually.
The underlying FTSE RAFI US 1000 Long/Short Total Return Index allocates an aggregate equal dollar amount to both long and short equity positions. The long equity positions consist of securities in the FTSE RAFI US 1000 Total Return Index, and the short equity positions consist of securities in the Russell 1000 Total Return Index. It charges 95 bps in fees.
The underlying index of the fund — the Morningstar Diversified Alternatives Index — provides diversified exposure to alternative asset classes while enhancing risk-adjusted portfolio returns when combined with a range of traditional investments. The fund charges 95 bps in fees.
The iShares S&P US Pref Stock Idx Fnd ETF (PFF) was unchanged in premarket trading Monday. Year-to-date, PFF has declined -4.03%, versus a 3.82% rise in the benchmark S&P 500 index during the same period.
This article is brought to you courtesy of Zacks Research.