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August has been a turbulent month for financial markets, with volatility showing a spike. Recessionary fears and the tech slump mainly led to the volatility in Wall Street. At the beginning of the month, a weaker-than-expected U.S. jobs report fueled fears of a potential recession, leading to a decline in U.S. stock markets. Plus, a more hawkish tone from the Bank of Japan triggered an unwinding of the yen “carry trade,” leading the Nikkei index to decline by more than 12%.
VIX Spike and Market Overreaction
On Aug 5, the VIX, a key indicator of expected market volatility, surged to 65 from around 23 on the previous trading day. However, the index quickly retraced as the markets gained momentum. Gerry Fowler, head of European equity strategy and global derivative strategy at UBS, described this spike as a “huge overreaction” during an interview on CNBC’s “Squawk Box Europe.”
More Volatility Ahead?
Fowler noted that UBS had anticipated an increase in volatility this year, due to declining nominal GDP, interest rate cuts, and uncertainty in the jobs market. He explained that while the recent volatility matches his expectations, the magnitude of the spike and subsequent pullback both appear to be exaggerated.
Looking forward, Fowler suggested that UBS expects markets to stabilize at slightly higher levels of volatility. Further, volatility is dependent on U.S. economic conditions. Against this backdrop, below we highlight a few ETF strategies that can help weather market volatility.
Focus on Dividends
Dividend-paying stocks provide a steady income stream and help mitigate potential losses during weaker market periods. These stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF (DGRO - Free Report) .
Try Low-Beta ETFs
Beta is a measure of a stock's volatility relative to the market. Low-beta stocks tend to have lower price fluctuations than the market, providing stability during market downturns. 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 falters. Core Alternative ETF (CCOR) and Innovator Defined Wealth Shield ETF (BALT) could be compelling picks.
Invest in Defensive Sectors
Some sectors, such as consumer staples, utilities and healthcare, tend to be less sensitive to economic cycles and more resistant to market downturns. These generally act as a safe haven during political and economic turmoil. Stocks in these sectors generally provide higher returns in troubled times.
Investors seeking exposure to these sectors could find Consumer Staples Select Sector SPDR ETF (XLP - Free Report) and Vanguard Health Care ETF (VHT - Free Report) intriguing picks.
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More Volatility Ahead? ETF Strategies to Play
August has been a turbulent month for financial markets, with volatility showing a spike. Recessionary fears and the tech slump mainly led to the volatility in Wall Street. At the beginning of the month, a weaker-than-expected U.S. jobs report fueled fears of a potential recession, leading to a decline in U.S. stock markets. Plus, a more hawkish tone from the Bank of Japan triggered an unwinding of the yen “carry trade,” leading the Nikkei index to decline by more than 12%.
VIX Spike and Market Overreaction
On Aug 5, the VIX, a key indicator of expected market volatility, surged to 65 from around 23 on the previous trading day. However, the index quickly retraced as the markets gained momentum. Gerry Fowler, head of European equity strategy and global derivative strategy at UBS, described this spike as a “huge overreaction” during an interview on CNBC’s “Squawk Box Europe.”
More Volatility Ahead?
Fowler noted that UBS had anticipated an increase in volatility this year, due to declining nominal GDP, interest rate cuts, and uncertainty in the jobs market. He explained that while the recent volatility matches his expectations, the magnitude of the spike and subsequent pullback both appear to be exaggerated.
Looking forward, Fowler suggested that UBS expects markets to stabilize at slightly higher levels of volatility. Further, volatility is dependent on U.S. economic conditions. Against this backdrop, below we highlight a few ETF strategies that can help weather market volatility.
Focus on Dividends
Dividend-paying stocks provide a steady income stream and help mitigate potential losses during weaker market periods. These stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.
In particular, high-quality dividend stocks with a history of consistent dividend payments and growth can offer both income and the potential for capital appreciation over the long term. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF (DGRO - Free Report) .
Try Low-Beta ETFs
Beta is a measure of a stock's volatility relative to the market. Low-beta stocks tend to have lower price fluctuations than the market, providing stability during market downturns. 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 falters. Core Alternative ETF (CCOR) and Innovator Defined Wealth Shield ETF (BALT) could be compelling picks.
Invest in Defensive Sectors
Some sectors, such as consumer staples, utilities and healthcare, tend to be less sensitive to economic cycles and more resistant to market downturns. These generally act as a safe haven during political and economic turmoil. Stocks in these sectors generally provide higher returns in troubled times.
Investors seeking exposure to these sectors could find Consumer Staples Select Sector SPDR ETF (XLP - Free Report) and Vanguard Health Care ETF (VHT - Free Report) intriguing picks.