On World Health Day, we would like to draw investors' attention to well-nourished ETFs that can immune a portfolio from market volatility that is so rampant now. Just like we need nutrients to lead a healthy life, given below are what an ETF portfolio needs to be in the pink.
Quality ETFs are generally rich on value characteristics as they focus on stocks with high quality scores based on three fundamentals - high return on equity, stable earnings growth, and low financial leverage. This approach seeks investments in safer stocks and reduces volatility when compared to plain vanilla funds. Academic research shows that high quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term. More importantly, these stocks generally outperform in a crumbling market (read: How to Play the Choppy Market with Cheap Smart Beta ETFs).
While there are several quality ETFs available in the space, the iShares MSCI USA Quality Factor ETF (BATS:QUAL) seems to be the most popular. This fund provides exposure to the stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth, and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index. In total, the fund holds 123 securities in its basket, which are pretty spread across a number of securities with none holding more than 5.03% of assets.
From a sector look, information technology takes the top spot at 20.5%, followed by financials (16.0%), healthcare (14.5%) and consumer discretionary (14.2%). The product has amassed $2.3 billion in its asset base and charges just 15 bps in annual fees from investors. Average trading volume is good at around 317,000 shares per day. The fund has returned nearly 36.7% to date since its inception in July 2013.
Low volatility products appear safe in a turbulent market, and reduce losses in declining markets. But these generate decent returns when markets rise. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these funds contain stocks of defensive sectors, which usually have a higher distribution yield than the broader markets (read: Low Volatility ETFs Still in Play).
In particular, the ultra-popular iShares MSCI USA Minimum Volatility ETF (BATS:USMV) having AUM of $11.4 billion and average daily volume of about 3 million shares, tracks the MSCI USA Minimum Volatility (NYSEARCA:USD) Index. It offers exposure to 168 U.S. stocks having lower volatility characteristics than the broader U.S. equity market. The fund is well spread across a number of components with each holding less than 1.71% share. From a sector look, financials, healthcare, information technology and consumer staples occupy the top positions with double-digit exposure each. Expense ratio comes in at 0.15%. The fund has delivered returns of 44.1% over the trailing five-year period.
Low beta ETFs exhibit greater levels of stability than their market-sensitive counterparts and will usually lose less when the market is crumbling. Though these have lesser risks and lower returns, the funds are considered safe and resilient amid uncertainty. However, when markets soar, these low beta funds experience lesser gains than the broader market counterparts but are still considered healthy. The PowerShares Russell 1000 Low Beta Equal Weight Portfolio ETF (NASDAQ:USLB) could be a solid pick.
This ETF has debuted in the space last November and has attracted $128 million in its asset base so far. It follows the Russell 1000 Low Beta Equal Weight Index, holding 306 well-diversified stocks in its basket with each holding less than 0.60% of assets. Volume is moderate exchanging 60,000 shares in hand on average. The product is skewed toward financials at 21.3%, followed by consumer discretionary (16.2%), industrials (13%), healthcare (10.8%) and consumer staples (10.5%). It charges investors 35 bps in annual fees and is up over 1% since inception.
Dividend paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. Dividend-focused products offer both safety in the form of payouts and stability in the form of mature companies that are less immune to the large swings in stock prices. While several choices are available in the dividend space, First Trust Morningstar Dividend Leaders Index ETF (NYSEARCA:FDL) looks attractive.
With AUM of $1.1 billion, the fund follows the Morningstar Dividend Leaders Index. In total, it holds 96 stocks that have shown the highest dividend consistency and dividend sustainability. The top two firms - Exxon Mobil (NYSE:XOM) and AT&T (NYSE:T) - dominate the returns of the fund holding over 9% share each. Other firms hold less than 7.4% of assets. Volume is solid as it exchanges more than 467,000 shares a day on average while expense ratio comes in at 0.45%. FDL surged 83.2% in the past five years.
Blend funds consist of a mix of both growth and value stocks and are considered most appropriate in any type of market. This is because these funds harness their momentum in earnings to create a positive bias in the market resulting in rocketing share prices. At the same time, these tap buying opportunities at depressed stock prices hoping for capital appreciation when the stock finally reflects its true market price. In particular, the iShares S&P 100 ETF (NYSEARCA:OEF) could be an interesting choice as it offers exposure to 102 mega-cap U.S. stocks by tracking the S&P 100 index.
It is slightly tilted toward the top firm - Apple (NASDAQ:AAPL) - at 5.4% while other firms hold no more than 3.81% of assets. As such, the fund has a nice mix of growth, value and blend stocks. About one-fourth of the portfolio is dominated by information technology while health care and financials round off the next two spots, with less than 15% allocation for each. OEF is by far the most popular and liquid choice in the mega cap space with AUM of $4.5 billion and average daily volume of around 1.2 million shares per day. It charges 20 bps in fees and surged 72.5% in the last five years.
A diversified portfolio in the equity world refers to investing in stocks of different companies, securities and industries in order to minimize overall risk and achieve optimal risk-adjusted returns. While there are several ETFs that offer diversification benefits, the Guggenheim S&P Equal Weight ETF (NYSEARCA:RSP) could be an interesting choice, as it offers almost equal allocation in the stocks of the S&P 500 index and does not allocate a big chunk to any sector.
The fund tracks the S&P Equal Weight Index, putting roughly 0.2% in each stock. Financials, consumer discretionary, information technology, industrials and healthcare are the top five sectors accounting for less than 18% share each. The fund has amassed nearly $9 billion in its asset base while sees volume of more than 1.2 million shares a day on average. It charges 40 bps in fees per year from investors and gained 66.5% over the past five years.