Following last month’s turmoil in the banking sector, heightened recessionary fears could keep the stock market under pressure in the near term. However, investing in a diversified portfolio of ETFs during an economic downturn can help to mitigate risk, minimize costs, and maintain liquidity, making it a sound investment strategy for many investors.
Therefore, I think investors could hedge their portfolios against the economic downturn by adding top ETFs: Invesco Total Return Bond ETF (GTO), iShares Core Conservative Allocation ETF (AOK), and First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID).
These ETFs pay stable dividends, and their diverse holdings could help investors earn gains even in the face of uncertainty.
The Consumer Price Index (CPI) dropped in March for the ninth consecutive month. As per the Bureau of Labor Statistics, prices rose 5% for the 12 months that ended in March, down from 6% in February. Annual CPI plunged to its lowest rate since May 2021.
However, inflation levels remain elevated, and the US central bank is trying to wrangle it down to its 2% target. Fed fund futures show odds favor a 25 basis-point rate hike in May 2023.
As a result, US stocks declined on Wednesday as investors assessed concerns over a coming recession. Additionally, the sudden collapse of the US banking sector has caused turmoil in the global financial market. These failures were the biggest bank failures in the United States since 2008.
Moreover, minutes from the March meeting of the Federal Open Market Committee included a presentation from staff members on potential repercussions from the failure of Silicon Valley Bank and other tumult in the financial sector that began in early March.
While Vice Chair for Supervision Michael Barr said the banking sector “is sound and resilient,” staff economists said the economy would take a hit.
Let’s take a look at the ETFs discussed above:
Invesco Total Return Bond ETF (GTO)
GTO is an actively managed fund that invests in debt securities, including corporate debt, asset-backed loans, mortgage-backed securities, bank loans, municipal bonds, and sovereign debt.
As of APRIL 11, 2023, the fund’s top holdings include CBOT 2 Year US Treasury Note Future with a 10.52% weight, United States Treasury Note/Bond 3.63% 03/31/2028 with an 8.15% weight, and United States Treasury Note/Bond 3.50% 02/15/2033 with a 7.27% weight.
GTO has $950.40 million in assets under management. Its expense ratio is 0.50%. Its NAV stands at $47.43 as of April 12. It has a beta of 0.22.
GTO’s annual dividend rate of $1.79 yields 3.78% on the current price level. Its dividend payouts have increased at a 5% CAGR over the past three years and a 7% CAGR over the past five years. The fund has a four-year average yield of 3.45%.
The ETF has gained 2.3% year-to-date to close its last trading session at $47.40. Its fund flows came in at $142.71 million over the past year and $51.80 million over the past month.
GTO’s strong fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of A, which equates to a Strong Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
GTO has an A grade for Trade and Buy & Hold and a B for Peer. In the 82-ETF B-rated Diversified Portfolio ETFs group, it is ranked #4.
Click here to see the POWR Ratings for GTO.
iShares Core Conservative Allocation ETF (AOK)
AOK is a fund of funds and seeks its investment objective by investing primarily in underlying funds that themselves seek investment results corresponding to their own respective underlying indexes. The index measures the performance of the S&P Dow Jones Indices LLC proprietary allocation model.
As of April 12, AOK’s top holdings include: iShares Core Total USD Bond Market ETF (IUSB), which makes up 58.53% of the portfolio, iShares Core S&P 500 ETF (IVV), with a weight of 16.25%, while iShares Core MSCI International Developed Markets ETF (IDEV) comprises 10.06% of the fund, and iShares Core International Aggregate Bond ETF (IAGG) represents 9.87% weight of the fund.
The fund has a NAV of $35.03 as of April 12, t. Its total expense ratio of 0.15% is substantially lower than the category average of 0.83%. It has $706.80 million in assets under management.
The fund’s annual dividend of $0.81 yields 2.31% on current prices. Its dividend payouts have increased at a 2.8% CAGR over the past five years. The fund has a four-year average yield of 2.19%.
AOK’s fund flows came in at $4.97 million over the past month. It has gained 2.9% over the past month and 8.2% over the past six months to close its last trading session at $35.04. It has a beta of 0.38.
This promising prospect is reflected in AOK’s POWR ratings. The ETF has an overall A rating, equating to a Strong Buy on our proprietary rating system.
AOK has an A grade for Trade, Buy & Hold, and Peer. It is ranked #5 in the same group.
One can access AOK’s ratings here.
First Trust NASDAQ Clean Edge Smart Grid Infrastructure Index Fund (GRID)
GRID is focused on companies engaged in the ‘smart grid’ movement, which seeks to upgrade America’s electricity grid with 21st-century technologies.
As of April 11, GRID’s top holdings include National Grid plc (NG) with 8.85% weight, followed by ABB Ltd. (ABBN) with 8.05%, Schneider Electric SE (SU) with 7.84%, and Eaton Corporation, PLC (ETN) with 7.18%.
Its NAV stands at 95.43 as of April 12. The fund has an AUM of $694.35 million. GRID has an expense ratio of 0.58%.
GRID pays $1.05 annually as dividends to its investors, which yields 1.10% on the prevailing market price. Its average four-year dividend yield stands at 0.95%.
Its fund flows came in at $21.91 million over the past six months. GRID has returned 30.2% in the last six months and 10.2% year-to-date to close the last trading session at $96.09.
GRID’s POWR Ratings reflect this promising outlook. The fund has an overall rating of A, equating to a Strong Buy per our proprietary rating system.
It also has an A grade for Trade, Buy & Hold, and Peer. GRID is ranked #6 in the same group.
To see the POWR Ratings for GRID, click here.
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GTO shares were unchanged in premarket trading Thursday. Year-to-date, GTO has gained 3.03%, versus a 7.11% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
3 of the Best Diversified Portfolio ETFs in the Industry StockNews.com
