Plenty Of ETFs With Favorable Risk Traits
Including dividends paid, the SPDR S&P 500 (NYSE: SPY) has gained 16.4 percent year-to-date, a move that might imply risk appetite at the sector level has been high in 2013.
While the higher-beta consumer discretionary and financial services sectors have been leadership groups this year, so have more docile sectors such as consumer staples and health care.
The risk-off tenor to this bull market is not new. Aside from consumer discretionary, it has been conservative, lower beta sectors that have done much of the leading for over three years.
Related: Risk On Rally? These ETFs Say No.
Investors looking for ETFs with favorable risk characteristics have plenty of options ranging from sector funds to non-U.S. developed market plays to dividend ETFs. Those looking for a wide array favorable risk ETFs can mull a group of 13 recently highlighted by S&P Capital IQ.
"This group of 13 ETFs includes a diversity of size, geographies and recent performance. However, all of them are also
ranked Overweight in our Risk Considerations category, and have a beta of less than 0.8, which means that they have shown less volatility than the S&P 500 during the past three years," said S&P Capital IQ in a new research note.
The group of 13 includes ETFs from four providers – iShares, State Street Global Advisors, Vanguard and WisdomTree. "Our list of 13 includes seven ETFs with a domestic stock emphasis, and six having more of an international or global weighting. However, keep in mind than when an ETF has a heavy concentration of U.S. stocks, this may include shares of large multi-national companies such as Johnson & Johnson (NYSE: JNJ) or Exxon Mobil (NYSE: XOM)," said S&P Capital IQ.
S&P Capital IQ's list of 13 ETFs with favorable risk traits includes four consumer staples sector funds: The Consumer Staples Select Sector SPDR (NYSE: XLP), the Vanguard Consumer Staples ETF (NYSE: VDC), the SPDR S&P International Consumer Staples Sector ETF (NYSE: IPS) and the iShares Global Consumer Staples ETF (NYSE: KXI).
Staples ETFs started 2013 in banner fashion. XLP, the largest staples ETF, and VDC, the cheapest staples ETF, are up an average of 15 percent year-to-date. However, the sectors has withered a bit in the face of rising U.S. interest rates. XLP, VDC and IXJ all have negative returns over the past 90 days. Still, all three earn Overweight ratings from S&P Capital IQ while IPS garnered a Marketweight rating.
Health Care ETFs
S&P Capital is similarly constructive on health care ETFs. The Health Care Select Sector SPDR (NYSE: XLV) and the iShares U.S. Healthcare ETF (NYSE: IYH), two ETFs that are heavy on blue-chip pharmaceuticals stocks like J&J, Pfizer (NYSE: PFE) and Merck (NYSE: MRK) along with large-cap biotechnology names, earned Overweight ratings from S&P Capital IQ.
However, the health care sector is home to some under the radar ETFs that also merit consideration. For example, the iShares MSCI ACWI ex U.S. Healthcare ETF (NYSE: AXHE) and the SPDR S&P International Health Care Sector ETF (NYSE: IRY) have less than $70 million in assets under management combined, but both have offered double-digit returns this year.
Investors looking for a global spin on health care without excluding the U.S. can consider the iShares Global Healthcare ETF (NYSE: IXJ). Like XLV and IYH, IXJ has risen over the past 90 days, indicating health care ETFs can be durable in rising interest rate environments. All of the aforementioned health care ETFs earned Overweight ratings from S&P Capital IQ.
Two of this year's more prominent ETF themes have been the massive inflows to dividend funds and Japan ETFs. The Overweight-rated WisdomTree Japan Hedged Equity Income Fund (NYSE: DXJ) and the iShares MSCI Japan ETF (NYSE: EWJ) are two of three most prolific asset-gathering ETFs this year.
"US and Japanese Equity exposures account for the bulk of the year-over-year Equity flow growth. Both equity markets have been bolstered by accommodative Central Bank monetary policies, said BlackRock earlier this month.
"As noted, all 13 of the ETFs were ranked Overweight in S&P Capital IQ's Risk Factors category. There are four analytical inputs in this category, including the S&P Quality Ranking, which assesses long-term growth and stability of earnings and dividends; and the Standard & Poor's Credit Rating," said S&P Capital IQ.
Speaking of dividends, the number of dividend ETFs on the market has grown by 75 percent since 2010 and at $87 billion in assets, dividend exchange-traded products represent 5.7 percent of all ETF and ETN assets in the world, according to BlackRock.
In terms of risk characteristics, S&P has an Overweight rating on the Vanguard High Dividend Yield Index ETF (NYSE: VYM) and a Marketweight rating on the WisdomTree LargeCap Dividend Fund (NYSE: DLN).
The Marketweight rating on DLN might be a tad harsh given the ETF's nearly 63 percent three-year return. Additionally, DLN is useful to income investors on multiple fronts. While the fund is more than adequately positioned as a consistent dividend play, DLN is not excessively exposed to rate-sensitive utilities or telecom stocks.
Just as important, DLN is well-positioned to help investors take advantage of future dividend growth with a combined a 36 percent weight to technology, financial services and discretionary names, the sectors that have been leading S&P 500 dividend growth over the past few years.
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Disclosure: Author is long DXJ.
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