Wall Street has taken a huge beating at the start of August with recession fears building up, especially after weaker-than-expected jobs data. The Dow Jones and the S&P 500 indices logged the worst five-day start to a month since January 2016, according to Dow Jones Market Data. In such a scenario, investors may want to remain invested in the equity world with some downside protection at the same time. This could be easily achieved by investing in low-beta products like Core Alternative ETF CCOR, Innovator Defined Wealth Shield ETF BALT, Global X S&P 500 Risk Managed Income ETF XRMI, Invesco S&P 500 Downside Hedged ETF PHDG and Simplify Hedged Equity ETF HEQT. These could be the safest bets for as long as the uncertainty lingers. Inside The Decline The labor market cooled in July as the economy added 114,000 jobs, 35% fewer than expected. Unemployment rose from 4.1% to 4.3%, the highest since October 2021, and represented the fourth consecutive monthly increase. The data prompted concerns about a recession. Another batch of data from the Institute for Supply Management also indicates slowdown worries. Manufacturing activity fell in July, marking the fourth straight month of contraction. Additionally, market rotation, where investors shunned hot technology stocks in favor of smaller companies and other sectors poised to benefit from rate cuts, took a toll on the stock market. Concerns that big technology companies’ shares, particularly those investing heavily in artificial intelligence AI, have been overvalued led to massive sell-offs last week and early this week. Further, soft earnings from some of the “Mag 7” as well as other big corporate giants dampened investors' mood (read: Should You Buy the Dip in Tech ETFs?). Traders are betting that the U.S. economy has lost steam and is on the verge of sliding toward a recession, given rising unemployment, high interest rates and fading confidence in the tech sector. Why Low Beta? Beta measures the price volatility of stocks or funds relative to the overall market. It has a direct relationship with market movements. 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. Investing in low-beta stocks during times of market volatility can offer several advantages:
Reduced Volatility: Low-beta stocks tend to have lower price fluctuations, making them more stable investments during turbulent market conditions (read: Market Volatility Jumps: ETFs to Tap).
Defensive Characteristics: Low-beta stocks are often found in defensive sectors like utilities, healthcare and consumer staples. These industries tend to perform relatively well during economic downturns, as their products and services are still in demand.
Dividend Income: Low-beta stocks are often associated with established, mature companies that pay regular dividends. Dividend income can provide a steady cash flow to investors and help offset potential declines in the stock's price.
Capital Preservation: By investing in low-beta stocks, investors can aim to preserve their capital during market downturns due to reduced volatility associated with these investments.
Diversification: Including low-beta stocks in a diversified portfolio can help balance out riskier, high-beta investments, potentially improving the overall risk-adjusted return of the portfolio.
That said, 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 fewer 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 their broader market counterparts and thus lag behind their peers.
ETFs in Focus
Core Alternative ETF CCOR: Beta - 0.09
The Core Alternative ETF is an actively managed ETF that utilizes several strategies to produce capital appreciation while reducing risk exposure across market conditions. It invests primarily in U.S. equities, specifically focusing on high-quality companies across all industries and sectors, that have prospects for long-term total returns as a result of their ability to grow earnings and their willingness to increase dividends over time.
The Core Alternative ETF holds 45 securities in its basket and charges a high expense ratio of 1.07%. It has amassed $141.5 million in its asset base.
Innovator Defined Wealth Shield ETF BALT: Beta - 0.10
Innovator Defined Wealth Shield ETF seeks to track the return of the SPDR S&P 500 ETF Trust SPY to a cap and provide a measure of downside protection by seeking to buffer investors against losses. The ETF targets a 20% buffer in every 3-month outcome period.
Innovator Defined Wealth Shield ETF has AUM of $674.9 million and charges 69 bps in annual fees.
Global X S&P 500 Risk Managed Income ETF XRMI: Beta - 0.35
Global X S&P 500 Risk Managed Income ETF seeks to track the Cboe S&P 500 Risk Managed Income Index. It employs a protective net-credit collar strategy for investors seeking the income characteristics of a covered call fund, while mitigating the risks of a major market selloff with a protective put. XRMI seeks to achieve this outcome by owning the stocks in the S&P 500 Index, while buying 5% out-of-the-money put options on the index and selling at-the-money call options on the same index (read: 5 Top-Ranked ETFs to Buy at a Bargain).
XRMI has amassed $121.4 million in its asset base and charges 60 bps in annual fees.
Invesco S&P 500 Downside Hedged ETF PHDG: Beta - 0.36
Invesco S&P 500 Downside Hedged ETF is an actively managed fund that seeks to deliver positive returns in rising or falling markets that are not directly correlated to broad equity or fixed-income market returns. Invesco S&P 500 Downside Hedged ETF tries to follow the S&P 500 Dynamic VEQTOR Index, which provides broad equity market exposure with an implied volatility hedge by dynamically allocating between different asset classes: equity, volatility and cash. The index allows investors to receive exposure to the equity and volatility of the S&P 500 Index in a dynamic framework.
Invesco S&P 500 Downside Hedged ETF has AUM of $121.4 million and charges 39 bps in fees per year from its investors.
Simplify Hedged Equity ETF HEQT: Beta – 0.42
Simplify Hedged Equity ETF seeks to provide capital appreciation by offering U.S. large-cap exposure while investing in a series of put-spread collars designed to help reduce volatility. By deploying a ladder of collars that expire over three sequential months, the fund seeks to create a hedged equity experience that is additionally robust to rebalancing luck.
With AUM of $176.2 million, Simplify Hedged Equity ETF charges 53 bps in annual fees.
Bottom Line
Investors should note that these products are not meant to generate outsized returns. Instead, these provide stability in the portfolio, protecting the initial investment. In particular, these products could be worthwhile for low-risk-tolerant investors looking to safeguard their portfolio in a rocky market and some outperformance, especially if market uncertainty prevails in the coming months.
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