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2 ETFs To Protect Your Portfolio From Earnings Season Volatility 

Published 19/07/2022, 09:34
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  • Inflation worries continue to weigh on equity markets
  • Earnings season will likely increase volatility
  • ETFs offer investors ability to diversify
  • Earnings season has started with mixed quarterly reports, fueling more price swings in an already highly volatile year for equities. All against a backdrop of a 41-year-high in the Consumer Price Index and intensifying worries about the Fed's next rate hike.

    The fear-gauge or the CBOE Volatility Index is up almost 47% since January at around 25.30.
    VIX Daily Chart

    In such a macroeconomic environment, many investors turn to exchange-traded funds (ETFs) to weather the storm. In the first half of 2022, US-listed ETFs saw net inflows of $294 billion, compared to $466 billion a year ago. In addition:

    "Equity funds led the industry in June, taking in $34 billion—92% of all flows. US equity ETFs led within equities, taking in $24 billion."

    Despite the sell-off on Wall Street, investors are willing to put their capital into ETFs. Financial services firm Brown Brothers Harriman suggests the wide range of asset classes and tactical strategies offered by ETFs make them increasingly popular in times of increased volatility.

    Today, we discuss two ETFs to consider during the choppy days ahead of this earnings season.

    1. First Trust Long/Short Equity ETF

    • Current Price: $48.17
    • 52-week range: $47.50 - $52.51
    • Expense ratio: 1.36% per year

    Actively managed ETFs—in which fund managers make frequent trades to adapt portfolios to changing market conditions—have been gaining popularity amid this year's market rout. For instance, according to Trackinsight's Global ETF Survey 2022, over a third of professional investors who responded could consider allocating more capital to actively managed funds.

    First on today's list is the First Trust Long/Short Equity ETF (NYSE:FTLS), an actively managed fund. It invests in long and short positions consisting of US-listed stocks of domestic and foreign companies and equity index futures contracts. In other words, it simultaneously bets on and against stocks to generate an above-average long-term total return. FTLS Weekly Chart

    FTLS started trading in September 2014, and net assets stand at $484.9 million. Currently, the ETF has both long and short exposure in all 11 sectors represented in the S&P 500 index. The net exposure is over 55%.

    The fund's top long positions currently include Apple (NASDAQ:AAPL), Microsoft (NASDAQ:MSFT), Vertex Pharmaceuticals (NASDAQ:VRTX) and Walmart (NYSE:WMT).

    Conversely, some of the leading short positions are in Fidelity National Information Services (NYSE:FIS); Verizon Communications (NYSE:VZ) ; and General Electric (NYSE:GE).

    So far, in 2022, FTLS has declined around 7.6%. In comparison, the S&P 500 has dropped 19.6%.

    However, it is also worth noting that the fund is one of the most expensive actively managed ETFs, with a total annual fee of 1.36%, including management fees, margin interest expense, and short sale fees. Nevertheless, we believe FTLS deserves further due diligence.

    2. iShares MSCI EAFE Min Vol Factor ETF

    • Current Price: $62.91
    • 52-week range: $60.90 - $79.65
    • Dividend yield: 3.02%
    • Expense ratio: 0.20% per year

    Low or minimum volatility ETFs allow investors to build defensiveness into portfolios and hedge against significant drawdowns. Due to the growing possibility of a US recession, many investors may consider global equities during the US earnings season.

    Next up on our list is the iShares MSCI EAFE Min Vol Factor ETF (NYSE:EFAV). It invests in shares of international companies with lower volatility characteristics. The fund was first listed in October 2011.EFAV Weekly Chart

    EFAV, which tracks the MSCI EAFE Minimum Volatility Index, currently has 234 stocks. Health care names have the largest slice, with 18.9%. Then come consumer staples (15.7%), industrials (13.2%), and financials (12.6%).

    Geographical allocations include Japan (27.4%), Switzerland (15.1%), the United Kingdom (10.6%), Hong Kong (7.9%), and France (6.1%). Meanwhile, the top 10 holdings account for 14% of $5.7 billion in net assets.

    Leading names include the Switzerland-based health care heavyweights Nestle (OTC:NSRGY), Roche (OTC:RHHBY), and Novartis (NYSE:NVS) as well as telephone operator Swisscom (OTC:SCMWY). Next are the Danish diabetes care specialist Novo Nordisk (NYSE:NVO) (CSE:NOVOb) and the UK-based utility name National Grid (LON:NG).

    EFAV has dropped roughly 18% since January and hit a 52-week low on June 14. Meanwhile, the current price supports a dividend yield of over 3%.

    The fund's trailing price-to-earnings (P/E) and price-to-book (P/B) ratios stand at 16.87x and 1.92x, respectively. Readers looking to add ex-US low-volatility exposure to their portfolios could consider researching the fund further.

    Disclaimer: On the date of publication, Tezcan Gecgil, Ph.D., did not have any positions in the securities mentioned in this article.

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