Following the Fed's latest policy decision on Sept. 16, Federal Reserve Chairman Jerome Powell Press discussed the "new normal," in which interest rates are likely to remain close to zero until the end of 2023, or even beyond.
Since rates came crashing down during the volatile days of the Great Recession of 2008/09, they have not risen significantly, meaning that by the time we reach 2023, it could be at least fifteen years until they start going up again.
Powell highlighted a number of concerns, saying that "the outlook for the economy is extraordinarily uncertain and will depend in large part on our success in keeping the virus in check," as well as emphasizing "a full economic recovery is unlikely until people are confident that it is safe to reengage in a broad range of activities."
The Bank of England echoed this message when addressing challenges for the UK economy and the outlook for interest rates, paving the way for negative rates.
Following Mr. Powell's comments, volatility levels increased, pressuring broader indices. While investors started worrying about how to invest during the new normal, many Wall Street darlings like Apple (NASDAQ:AAPL) closed the week in the red.
Given that coronavirus continue to influence the economy and interest rates are likely to remain low for the coming years, here we'll look at two exchange-traded funds (ETFs) that are positioned to benefit in this environment:
1. Legg Mason Low Volatility High Dividend ETF
- Current Price: $29.71
- 52-Week Range: $21.20 - $34.69
- Dividend Yield: 3.94%
- Expense Ratio: 0.27% per year, or $27 on a $10,000 investment
Rock-bottom interest rates mean finding worthwhile passive-income investments is becoming increasingly difficult. Meanwhile, the choppiness in equity markets may, at times, be frightening for retail investors. For such market participants, the Leg Mason Low Volatility High Dividend ETF (NASDAQ:LVHD) may be worth a closer look. This low volatility fund can offer a smoother ride even when the markets are down.
LVHD, which currently has 76 holdings, provides exposure to US-based businesses with relatively lofty dividend yields and low price and earnings volatility. No individual sector exceeds 25%-weighting.
The top sector allocation is Consumer Staples (17.37%), followed by Utilities (16.67%), Real Estate (15.96%), Health Care (12.22%), Industrials (10.88%), Information Technology (9,59%), Financials (6.82%), Communication Services (6.48%). Materials (2.21%) and Consumer Discretionary (1.22%).
The fund's top ten holdings constitute over 26% of net assets, which stand around $700 million. United Parcel Service (NYSE:UPS), Public Storage (NYSE:PSA), Kimberly-Clark (NYSE:KMB), Eaton (NYSE:ETN) and AbbVie (NYSE:ABBV) head the list.
So far in the year, LVHD is has fallen close to 13%. However, since the low in March, the ETF has climbed around 45%. Unlike many other momentum names, the sell-off in September has not hit the ETF dramatically, with LVHD sinking only around 1% so far this month, from $30.03 at August's close to $29.71 on Friday. By comparison, many high-flying tech shares, have declined by double-digits. The fund’s trailing P/E and PB ratios are 15.5% and 3.6% respectively, Long-term investors may consider buying the dips.
2. Amplify International Online Retail ETF
- Current Price: $39.91
- 52-Week Range: $18.57 - $41.50
- Dividend Yield: 0.12%
- Expense Ratio: 0.69% per year, or $69 on a $10,000 investment
Since COVID-19 has accelerated the shift to online shipping, interest in e-commerce companies has also been gaining momentum.
The Amplify International Online Retail ETF (NYSE:XBUY) may be appropriate for those who believe the size of e-commerce transactions outside the US will continue to expand.
XBUY, which has 50 holdings, tracks the EQM International Ecommerce index, was set up in 2019.
The top ten holdings constitute close to 30% of the fund, whose net assets stand around $10 million. In other words, while it is still a relatively small fund, no single company is large enough to strongly affect the price of XBUY. The top ten holdings are Oisix (T:3182), ASOS (OTC:ASOMY), Demae-Can (T:2484), Fiverr International (NYSE:FVRR), Ocado (LON:OCDO), Webjet (ASX:WEB), Kogan.com (ASX:KGN), Airtrip (T:6191), Shop Apotheke Europe (BE:SAEG) and Zalando (OTC:ZLNDY).
The industry allocation is Traditional Retail (53.0%), Marketplace (35.3%), and Travel (11.7%). In terms of country weightings, Japan and China top the list with around 20% each. Next in line are the UK (14.1%), Germany (10.9%), Australia (6.2%), Argentina (4.6%) and Israel (4.4%).
Year-to-date, the fund is up over 41%. In fact, it hit an all-time high on Sept. 2. As the market decline in the US extends to other countries, investors may decide to take some money off the table. Any drop toward the $35-level would make the fund more attractive.
The shift away from brick and mortar stores towards online platforms will likely drive growth in many names held in the fund in the coming quarters. Yet, since this is a small and young fund, it should typically not have a large weighting in an individual portfolio.
Finally, those interested in more US-focused e-commerce may want to research the ProShares Online Retail (NYSE:ONLN) or the Amplify Online Retail ETF (NASDAQ:IBUY)