ETFs to Consider for a Likely August Slump

According to flow specialists at Goldman Sachs, as quoted on Yahoo Finance, the S&P 500’s rally is anticipated to continue through July, driven by improving liquidity, declining volatility and easing recession fears, with the market’s momentum fading as August approaches.

Even if market bulls increase their bets, underlying risk factors remain, making it prudent for investors to increase exposure to defensive funds.

Why Investors Should Remain Cautious

Inflationary pressures, intensified by the tariffs proposed by President Donald Trump, continue to be a major headwind for the U.S. economy. According to Fed Chair Jerome Powell, as quoted on NBC News, additional impacts from the tariffs may surface soon.

The tariff pause announced in early April is nearing its deadline next week, potentially reigniting inflationary pressures. This could reverse the market rally that followed the pause, which had sparked a bullish run that sent the S&P 500 up approximately 25% by the end of the first half.

Concerns over U.S. debt levels, coupled with leadership and political uncertainty of the Fed, add pressure to investor confidence. A possible Fed leadership shake-up remains a significant source of investor unease.

Equity Funds Can't Catch a Break

According to LSEG Lipper data, as quoted on Reuters, investors pulled a net $20.48 billion from U.S. equity funds last week, marking the sixth consecutive week of outflows and the largest weekly outflow since March 19.

ETFs to Consider

Preserving capital and cushioning volatility is key for investors looking to navigate a volatile period ahead.

Investors should adopt a defensive approach as it's better to be cautious than unprepared. With ETFs offering the additional benefit of instant diversification and tax efficiency, investors can use ETFs to increase exposure to defensive funds.

Investing in these sectors provides dual benefits, protecting portfolios during market downturns and offering gains when the market trends upward.

Consumer Staples ETFs

Increasing exposure to consumer staple funds can bring balance and stability to investors’ portfolios. Investors can put more money in consumer staples funds to safeguard themselves from potential market downturns. The S&P 500 Consumer Staples Index has gained 5.88% year to date and 10.30% over the past year.

Investors can consider Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC and iShares U.S. Consumer Staples ETF IYK.

Dividend ETFs

Dividend-paying securities serve as primary sources of reliable income for investors, particularly during periods of equity market volatility. These stocks offer dual advantages of safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. Companies offering dividends often act as a hedge against economic uncertainty.

Investors can consider Vanguard Dividend Appreciation ETF VIG, Schwab US Dividend Equity ETF SCHD and Vanguard High Dividend Yield Index ETF VYM, which have dividend yields of 1.70%, 3.75% and 2.61%, respectively.

Investors can also consider global dividend-focused funds. According to LSEG Lipper, as quoted on Reuters, global dividend funds drew $23.7 billion in inflows during the first half of the year, the highest in three years. Regionally, Europe led with an average dividend yield of 3%, followed by Asia-Pacific at 2.6%, while the United States trailed with a modest 1.4% yield.

Investors can consider Vanguard International Dividend Appreciation ETF VIGI and iShares International Select Dividend ETF IDV, with dividend yields of 1.82% and 5.12%, respectively.

More Defensive Options

Investors can consider quality and value funds if they want to increase their exposure to more defensive funds. Funds like Vanguard Value ETF VTV and iShares MSCI USA Quality Factor ETF QUAL are good options.

Investors can also increase exposure to volatility ETFs like iPath Series B S&P 500 VIX Short-Term Futures ETN VXX. These funds have delivered short-term gains during periods of market chaos and could climb further if volatility persists.

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This article originally published on Zacks Investment Research (zacks.com).

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