Nervous Investors Pile Into Low Volatility, Defensive ETFs

Lately, the U.S. stock market has been caught in a vicious circle of trading as higher interest rates, collapse in oil prices, concerns over trade war and its resultant threats on the global economy unnerved investors. Additionally, the strong profit growth era seems to be coming to an end with most analysts expecting an earnings decline next year due to tariffs, fading impact of the tax cuts and higher borrowing costs.

Amid such a scenario, investors are piling into low volatility ETFs. This is because these products have the potential to outpace the broader market in bearish conditions or in an uncertain environment providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these are allocated primarily to defensive sectors that usually have a higher distribution yield than the broader markets.

Defensive sectors like utilities and healthcare are also seeing some capital inflows. In particular, the utilities sector is making the most of the prevailing uncertainty. Being the low-beta sector, utility is relatively protected from large swings (ups and downs) in the stock market and is thus considered a defensive investment or safe haven amid economic or political turmoil.

Healthcare, which generally outperforms during periods of low growth and high uncertainty, also garnered investors’ interest due its non-cyclical nature.

Given this, we have highlighted few ETFs from these zones that saw solid inflows since Nov 12.

Utilities Select Sector SPDR (XLU - Free Report)

With AUM of $8.6 billion, XLU has attracted nearly $1 billion in its asse

t base since Nov 12, per etf.com. It provides exposure to a small basket of 29 securities by tracking the Utilities Select Sector Index. The fund is heavily concentrated on the top firm while other firms hold no more than 8.6% share. Electric utilities take the top spot in terms of sectors at 61.9%, closely followed by multi utilities (327%). The product charges 13 basis points (bps) in annual fees and sees a heavy volume of around 17.2 million shares on average. XLU has gained 0.6% since Nov 12 and has a Zacks ETF Rank #3 (Hold) with a Medium risk outlook.

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