Best ETFs to Beat Market Volatility

July 10, 2022

2022 has been a rough year so far for stocks. This is due to a number of factors causing fear in the eyes of investors such as fed rate hikes, prolonged inflation, and geopolitical tensions in eastern europe. The market volatility we’re experiencing in 2022 can be difficult to manage for all investors. Investments that worked last year are suffering because often the things that go up the most in a bull market go down the most in a bear market. And though we all know another bull market will come along in the future, we don’t know when that might be. That’s why it’s beneficial to look for ETFs that can outperform during these periods of market volatility, and will still give you some upside if the market suddenly turns around. 

market volatility

Why ETFs and not stocks?

These opportunities almost all come in the form of ETFs for one reason – diversification. Diversification is the number one rule of investing because it removes risk while keeping a good return profile. ETFs give you broad market diversification with a very small expense ratio, some as low as 0.01% a year. Although some ETFs are broad based and good diversifying instruments, not all of them are. So make sure to take a look at the funds holdings or contact a financial advisor before making any investments. 


Vanguard High Dividend Yield ETF (VYM)

The vanguard high dividend ETF has been one of the most successful ways to outperform the S&P during the first 6 months of 2022. It is seen as a low risk ETF because of its broad diversification and low expense ratio of 0.06%. This ETF holds an index of value oriented stocks with low P/E ratios and high dividends. Meaning these stocks will tend to have low beta, moving less than the market when it goes up and down. In the first 6 months of 2022 VYM outperformed SPY by over 10%. This outperformance will likely continue if inflation data as measured by the CPI doesnt retract. If this is the case the fed will have to continue to tighten monetary policy through rate hikes and quantitative tightening which in turn will slow the economy and ease inflation. Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields. It is beneficial because it provides a convenient way to track the performance of stocks that are forecasted to have above-average dividend yields. The ETF Follows a passively managed, full-replication approach.


JPMorgan Equity Premium ETF (JEPI)

JEPI has had outstanding performance compared to the broader market this year due to many factors. This fund has a broad range of quality dividend paying stocks, and also collects option premium against these positions through covered calls. Covered calls are often compared to renting out a house. If you own 100 shares of any stock, you can sell a covered call and collect what’s called “premium” (in this example, rent) on a weekly, or monthly basis. The risk is using this strategy is that if the price of the stock moves up quickly, you might have to sell your stock at that higher price and lose upside potential if the stock keeps going up. This is known as opportunity cost. During down markets though, there is very little opportunity cost, and you just keep collecting rent (premium), every month. Although options strategies like covered calls can be extremely confusing and risky the beautiful thing about this ETF is that the professionals will do it for you for 0.35% a year. Which might seem like quite a bit compared to other ETFs we will discuss but for the complexity of the strategy, it is likely worth it. The fund has returned over 13% in the past year in dividend and covered call premium alone. This is essentially the outperformance it has seen over the broad market indexes like the S&P 500


Low Volatility – iShares Edge MSCI Min Vol USA ETF (USMV)

Low-volatility ETFs have the potential to outpace the broader market in an uncertain market environment, providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to the defensive sectors that usually have a higher distribution yield than the broader markets. While there are several options, iShares Edge MSCI Min Vol USA ETF with AUM of $28 billion and an average daily volume of 4 million shares is the most popular ETF. The fund offers exposure to stocks that have lower volatility characteristics relative to the broader U.S. equity market.


Quality – iShares Edge MSCI USA Quality Factor ETF (QUAL)

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings.


With AUM of $22.6 billion, iShares Edge MSCI USA Quality Factor ETF provides exposure to large and mid-cap stocks exhibiting positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage) by tracking the MSCI USA Sector Neutral Quality Index and holds 125 stocks in its basket. iShares Edge MSCI USA Quality Factor ETF charges 15 bps in annual fees and trades in an average daily volume of 1.5 million shares.


Dividend – Vanguard Dividend Appreciation ETF (VIG)

The dividend-paying securities are the major sources of consistent income for investors, when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. The companies that offer dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

While the dividend space has been crowded, ETFs with stocks that have a strong history of dividend growth like Vanguard Dividend Appreciation ETF seem to be good picks. It holds 267 stocks in its basket with AUM of $65.5 million. Vanguard Dividend Appreciation ETF trades in volume of 2.2 million shares a day on average and charges 6 bps in annual fees.

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