After a highly volatile May, the first trading day of June was dull. The blue-chip index, the Dow Jones Industrial Average, dipped 0.5% and the S&P 500 Index slid 0.8% on Jun 1. Moreover, the tech-heavy Nasdaq composite Index started the month by losing 0.7%.
The market is worried about the U.S. economic health and the impact of the Federal Reserve’s rate hikes. According to Liz Young, SoFi’s head of investment strategy, “We probably see volatility for the first half of June, and maybe a decent portion of June, because we’re not going to have any new information that calms us down before then,” as mentioned in a CNBC article.
JPMorgan (JPM) CEO Jamie Dimon’s statement on the U.S. economy left investors worried. He sees an economic hurricane to hit soon. He also mentioned to analysts and investors at a financial conference that “You better brace yourself. JPMorgan is bracing ourselves and we’re going to be very conservative with our balance sheet,” according to a CNBC article.
Dimon is concerned about the Russia-Ukraine conflict already escalating essential commodity prices, including food and oil. This can affect the U.S. economic health and its recovery from the pandemic-lows. He is also unnerved about the Federal Reserve, which is set to begin the quantitative tightening program this month and start shrinking its nearly $9-trillion worth of balance sheet (per a CNBC article).
The U.S. consumers are clearly feeling the pinch of persistently high inflation levels and the Federal Reserve’s hawkish stance on the interest rate hike. Consequently, the Conference Board's measure of consumer confidence index slipped to 106.4 in May 2022 from an upwardly revised reading of 108.6 in April. Notably, the metric continues to be below the pre-pandemic level of 132.6 achieved in February 2020 but surpassed its pandemic lows.
Top-Ranked Safe ETFs to Consider
Carefully studying the current backdrop, we highlight some top-ranked ETFs that can be relatively safe options either owing to their nature or some favorable external factors:
Vanguard High Dividend Yield ETF VYM
Generally, rising rate environments do not bode well for dividend-paying stocks. However, in the current environment, rates are being hiked to curb high inflation levels. Moreover, investors have a defensive sentiment due to the potential of an economic recession in the United States. Thus, investors are searching for alternative sources of yields that can generate steady cash flows. Traditionally, quality dividends can be more value-oriented investments.
VYM seeks to track the performance of the FTSE High Dividend Yield Index. With an AUM of $46.70 billion, Vanguard High Dividend Yield ETF charges 6 basis points (bps) as annual fees. VYM has a Zacks ETF Rank #1 (Strong Buy) (read: How to Build an Income-Focused Equity Portfolio With ETFs).
The Health Care Select Sector SPDR Fund XLV
The healthcare sector stands as a good defensive investment option as several investors believe that consumers will have to purchase healthcare products even during tough and uncertain times. Currently, the Russia-Ukraine war crisis and the tightening monetary policy caused a lot of uncertainty in the markets. Undoubtedly, the pandemic also triggered a race to introduce vaccines, tests and treatment options, opening up investment opportunities in the healthcare sector.
The Health Care Select Sector SPDR Fund seeks to provide investment results that before expenses, correspond generally to the price and yield performance of the Health Care Select Sector Index. XLV manages an AUM of $40.02 billion and charges 10 bps in fees. The Health Care Select Sector SPDR Fund sports a Zacks ETF Rack #1 (read: Bet on These 2 ETF Areas Amid Current Market Rout).
Vanguard Mega Cap Value ETF MGV
It is worth noting here that value investing seems more lucrative, given the expectation of higher inflation and the chances of Fed interest rate hikes. Moreover, value stocks seek to capitalize on market inefficiencies. They can deliver higher returns with lower volatility than their growth and blend counterparts. Additionally, value stocks are less exposed to trending markets and their dividend payouts offer a shield against market turbulence.
With an AUM of $5.75 billion, Vanguard Mega Cap Value ETF tracks the performance of the CRSP US Mega Cap Value Index. It charges a fee of 7 bps and has a Zacks Rank #1 (read: 5 Value ETFs to Buy Now for Outperformance).
The Real Estate Select Sector SPDR Fund XLRE
Investors might frown at the prospect of investing in REITs amid the rising rate environment. However, these investment vehicles can provide equity exposure while consistently paying out dividends and providing good diversification benefits. Moreover, REITs provide good exposure to growth-oriented areas like data centers and cellphone towers that are well-positioned to gain from an improving economy. Also, REITs are popular for hedging naturally against inflation. Notably, rising property prices and increasing rental income in an inflationary environment make REITs a good investment option.
The Real Estate Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Real Estate Select Sector Index. XLRE has an AUM of $5.74 billion and charges a fee of 10 bps. XLRE has a Zacks ETF Rank #2 (Buy).
iShares U.S. Energy ETF IYE
The energy sector has been one of the most favorite investing areas for the market participants so far in 2022. The sector has been gaining for a while on several external tailwinds. The accelerated distribution of the coronavirus vaccines is steadily providing support to contain the outbreak, reopen global activities and recover economies. The energy space has been a large beneficiary of the oil market conditions so far, marked with tightening supply-demand amid the Russia-Ukraine crisis. Oil prices have been rallying amid the Russia-Ukraine geopolitical crisis.
The iShares U.S. Energy ETF seeks investment results that generally correspond to the price and yield performance of the Russell 1000 Energy RIC 22.5/45 Capped Gross Index. IYE has an AUM of $3.26 billion and charges a fee of 0.41%. IYE has a Zacks ETF Rank #1 (read: Bet on These 2 ETF Areas Amid Current Market Rout).
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