- ETFs are lucrative investment opportunities, but their thematic traits require them to be timed correctly.
- USA Quality Factor iShares Edge MSCI ETF (QUAL): Quality stocks tend to outperform the market during contractionary economic cycles.
- USA Value Factor iShares Edge MSCI ETF (VLUE): Value plays are often a go-to in inflationary environments.
- Energy Select Sector SPDR (XLE): Energy prices are booming, and XLE is a low-cost conviction play in this case.
- S&P Metals & Mining SPDR (XME): Metals’ recent drawdown is unjustified, and XME provides a diversified “buy-the-dip” opportunity.
- KBW Bank Invesco ETF (KBWB): Rising interest rates could add value to this ETF. Additionally, KBWB offers a lucrative dividend with a low-expense ratio.
- Gold SPDR (GLD): A “best-in-class” pick if you’re a stock market bear. This ETF provides exposure to real assets at a fraction of the cost.
- Transportation Average iShares ETF (IYT): A well-diversified reopening play that could benefit from a return to normality.
Exchange-traded funds, or ETFs for short, are becoming increasingly popular. ETFs are exchange-listed investment funds that offer investors an opportunity to gain exposure to a multitude of stocks at little cost. Furthermore, ETFs are diversified vehicles, which means they flatten out idiosyncratic risks and, in turn, provide better risk-return profiles than individual stocks.
The market’s been topsy-turvy of late, and certain ETFs have a track record of handling volatile market environments with disdain. ETFs are typically thematic and use “smart beta” strategies to allocate capital, which is a cutting-edge portfolio management technique that emphasizes cyclical portfolio diversification.
My screening process for this article assumed a top-down approach, which I followed up by a “best-in-class” selection. Additionally, I picked ETFs that I’m invested in myself, thus, ensuring I have a granular understanding of each one of them.
So without further ado, let’s get into it! Here are seven ETFs to consider in the current market climate:
|QUAL||USA Quality Factor iShares Edge MSCI ETF||$123.34|
|VLUE||USA Value Factor iShares Edge MSCI ETF||$98.54|
|XLE||Energy Select Sector SPDR||$75.38|
|XME||S&P Metals & Mining SPDR||$55.03|
|KBWB||KBW Bank Invesco ETF||$57.16|
|IYT||Transportation Average iShares ETF||$240.85|
USA Quality Factor iShares Edge MSCI ETF (QUAL)
This ETFs main attraction is its consistency. The USA Quality Factor iShares Edge MSCI ETF’s (BATS:QUAL) stock selection emphasizes balance sheet health and various return metrics. Blackrock (NYSE:BLK) constructed this ETF to outperform others in down markets, making it a perfect option for those seeking to hedge against the current risk-off sentiment.
QUAL is a passively managed fund that exhibits cross-sector exposure with some of its primary constituents, including Johnson & Johnson (NYSE:JNJ), NIKE (NYSE:NKE), and Apple (NASDAQ:AAPL). Furthermore, the ETF presents an average dividend yield of 1.28% and a 1-year tracking error of only 3.35%.
This ETF is the ideal risk-return utility play if you ask me!
USA Value Factor iShares Edge MSCI ETF (VLUE)
Value investing is an excellent option at the moment as the style factor tends to outperform others in high-inflation environments. Additionally, the commodities supercycle and contractionary monetary policy may also give rise to value stocks as their integrated business models provide investors with a safety net.
BlackRock’s USA Value Factor iShares Edge MSCI ETF (BATS:VLUE) is a “best-in-class” option for those who’re believers in value. The fund is passively managed and filled with deep value plays such as AT&T (NYSE:T), Pfizer (NYSE:PFE), and Ford (NYSE:F). Another exciting aspect about the asset is its 2.95% forward dividend yield, which presents an alternative to investors if value appreciation doesn’t come to fruition.
Lastly, VLUE exhibits an expense ratio of only 0.15%, meaning that your returns won’t be eroded by exorbitant management fees.
Energy Select Sector SPDR (XLE)
Energy Select Sector SPDR (NYSEARCA:XLE) provides energy sector exposure and should be treated as a conviction-play. I think we’ll see commodity prices remain elevated for the rest of the year, with crude and natural gas being the catalysts due to their elastic non-core inflation properties.
State Street’s (NYSE:STT) XLE ETF is a lucrative option because it’s well-diversified throughout the entire energy value chain, as its key holdings include Chevron (NYSE:CVX), Occidental Petroleum (NYSE:OXY), and Exxon Mobil (NYSE:XOM). Furthermore, XLE’s forward dividend yield of 3.21% exceeds most ETFs’ income-generating capabilities, and its expense ratio of 0.10% is as low as it gets.
State Street’s XLE has achieved a year-to-date (YTD) return of more than 30%, but I’m backing it to sustain its momentum through the year.
S&P Metals & Mining SPDR (XME)
This is another State Street product. The S&P Metals & Mining SPDR (NYSEARCA:XME) tracks the Materials Select Sector Index (NYSEARCA:XLB) and is a “buy-the-dip” opportunity; it’s as simple as that. Ferrous and base metals have capitulated recently as Covid-19 issues persist in China, but the sector’s sell-off has been overdone. I’m saying this because I still see plenty of buying opportunities in the market for precious metals during this wild inflationary period, and industrial metals will follow suit once China’s economic activity recovers.
XME’s key holdings include the likes of Newmont (NYSE:NEM), Cleveland-Cliffs (NYSE:CLF), and Freeport-McMoRan (NYSE:FCX). Additionally, the fund exhibits a forward dividend yield of 0.51% and sports an expense ratio of 0.35%.
This ETF will remain a good option until inflation issues get resolved.
KBW Bank Invesco ETF (KBWB)
The KBW Bank Invesco ETF (NASDAQ:KBWB) should be at the top of your list if you’re a “rising rates” optimist. KBWB tracks the banking industry with its key holdings, including JPMorgan (NYSE:JPM), Citigroup (NYSE:C), and Bank of America (NYSE:BAC), which are all oversold.
Another Federal Reserve rate hike is surely in the offing soon, which could send bank stocks surging. With a beta of only 1.52, KBWB’s more than 15% year-to-date drawdown isn’t realistic, and we’ll likely see the fund revert to mean during the back-end of the year.
KBWB looks good from a quantitative vantage point with a forward dividend yield of 2.57% and an expense ratio of only 0.35%. Additionally, KBWB’s average daily volume for the past three months is around 102 million, suggesting that sharp action is in play here.
Gold SPDR (GLD)
Gold SPDR (NYSEARCA:GLD) was established in 2004 with the goal of tracking gold bullion. The ETF’s value add is that it emphasizes high-grade gold deposits that yield less volatility, thus, presenting a better down-market hedge than most assets. Furthermore, GLD offers a cost-effective option to investors who’re seeking exposure to real assets that benefit from storage costs.
This ETF doesn’t pay a dividend, nor is it a “get rich quick” investment opportunity. Instead, GLD presents downside protection at an expense ratio of only 0.40%.
Transportation Average iShares ETF (IYT)
This is probably my favorite pick of the bunch. The Transportation Average iShares ETF (BATS:IYT) is another BlackRock ETF but this one invests in stocks throughout the transportation value chain. The appeal here is its reopening characteristics with the add-on of being early to market on some of the stocks that have suffered due to supply chain lags.
IYT’s key holdings include Union Pacific (NYSE:UNP), Southwest Airlines (NYSE:LUV), and FedEx (NYSE:FDX). It’s a well-diversified ETF with a lucrative forward dividend yield of 0.89% and an expense ratio of only 0.41%.
I’d say that this ETF is a multi-duration option because investors will likely benefit from short-term conviction as well as long-duration exploitation.
On the date of publication, Steve Booyens held long positions in QUAL, VLUE, XLE, XME, KBWB, GLD, and IYT. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.