Stocks have rebounded nicely off their February 11 lows and many are now almost break-even for the year. The sharp sell-off seen earlier this year was driven largely by fears of a US recession and global deflation. The recent economic data in the US has mostly been better than expected, showing recession fears were overdone. A dovish tone from the Fed further boosted stocks. (Read: Crude Back to $40; Can Energy ETFs Sustain Their Rally?)
At the same time, with earnings recession in the US and anemic global growth, there is no strong catalyst for stocks to advance further. Volatility is also expected to stay elevated as we approach the elections. Most likely the market will continue to trade in a directionless manner with frequent ups and downs in the near future, until there is a clear catalyst to push the market significantly up or down.
In such an environment, it would be prudent for investors to focus on capital preservation and increase allocation to defensive stocks and ETFs. Defensive strategies outperform during periods of low growth and high uncertainty. They are a great way to guard the portfolio during the current uncertain market environment. (Read: 5 Costly ETF Mistakes You can Easily Avoid)
PowerShares S&P 500 High Dividend Low Volatility ETF (SPHD – ETF report)
SPHD tracks the performance of 50 companies that have been paying out high dividends and have low volatility. For selection of constituents, they start with 75 stocks with highest dividend yields within the S&P 500 Index and then select 50 stocks with lowest realized volatility over the trailing 252 trading days. Individual security exposure is capped at 3%, largely eliminating company specific risk.
Looking at sector exposure– Financials, Utilities and Industrials occupy the top three spots. The product has a reasonable expense ratio of 30 basis points and has an attractive yield of 3.3% as of now. The ETF is up about 11.6% this year.
Guggenheim Defensive ETF (DEF – ETF report)
The fund provides exposure to defensive market sectors that have historically outperformed in down markets and helps portfolio better weather periods of heightened volatility, while remaining positioned to take advantage of market upswings. It employs an equal weigh methodology and selects stocks based on fundamentals such as strong balance sheet, dividends, conservative accounting practices, and a recent history of out-performance during weak market days.
The product is slightly pricey with an expense ratio of 65 basis points but it has an attractive yield of 3.3% as of now. The ETF is up about 5.1% this year.
Tyson Foods (TSN)
