Play These ETF Strategies as Dow Posts Worst Q1 on Record

Sweta Jaiswal, FRM

The Dow Jones Industrial Average witnessed its worst quarterly performance since 1987, largely due to the coronavirus-led sell-offs. The blue-chip index lost more than 23% of its value in first-quarter 2020 as the coronavirus pandemic tightened its grip on countries outside mainland China. Seeing the biggest quarterly loss since 2008, the S&P 500 has also depreciated 20% in the worst first quarter, followed by a 14% decline of the Nasdaq Composite. The Dow Jones and S&P 500 indices also witnessed their worst one-month declines since the 2008 financial crisis this March, after declining 13.7% and 12.5%, respectively (read: Play These ETFs to Combat Coronavirus Crisis).

However, a rally in major U.S. indices was observed as investors welcomed the Senate passing the mammoth stimulus bill. Nevertheless, uncertainty regarding controlling the pandemic took over and the aggravating outbreak has started raising questions on whether or not the more than $2-trillion stimulus package will be sufficient to sail through the crisis.

The United States has recorded more than 185,400 cases, with a death toll of more than 3,800. Highlighting the grim scenario, President Trump said on Mar 31 during a White House news conference, "I want every American to be prepared for the hard days that lie ahead. We're going to go through a very tough two weeks." The top government scientists have estimated that even if the current social-distancing guidelines are maintained, the country will likely see around 100,000-240,000 deaths due the coronavirus pandemic. To combat this, President Trump extended the federal government’s guidelines for social distancing until Apr 30.

The job market is also expected to be severely hit as Americans are increasingly filing claims for unemployment benefits. Per the latest report released by the Labor Department on Mar 26, U.S. unemployment claims surged to a record 3.28 million last week (ending Mar 20). The number surpassed the count of 695,000 that was recorded during the financial crisis. With elevated unemployment levels, the spending capacity of consumers will, undoubtedly, be compromised to a large extent. The latest reports on U.S. consumer sentiment show that the metric dropped to nearly a three-and-a-half-year low in March, reflecting the impact of the coronavirus outbreak. The index of consumer sentiment slipped to 89.1 in March (lowest since October 2016) and also compared unfavorably with 101 in the previous month (read: ETFs at Risk as US Consumer Sentiment Hits Near 3.5-Year Low).

In such a scenario, JPMorgan trimmed its U.S. GDP estimates for the first half of 2020. It now expects the U.S. economy to shrink 10% in first-quarter 2020 in comparison to a 4% contraction estimated previously.

The S&P Global Ratings also forecasts U.S. GDP growth in the ongoing year to contract 1.3%, including a fall of 12% in the second quarter from the first. Moreover, the global chief economist for S&P Global Ratings has said that “the industries most vulnerable to social distancing and the collapse in global demand, such as airlines, transportation, and retail, or those heavily dependent on cross-border supply chains are likely to suffer most, both from slumping cash flows and much tighter financing conditions.”

Against this backdrop, investors can take a look at the following ETF strategies to combat the ongoing coronavirus crisis:

Treasury ETFs

Investors’ risk-off sentiments, along with the global stimulus packages, in order to protect the economy from the rapidly-aggravating coronavirus outbreak makes investing in Treasuries more attractive. As such, investors can tap the opportunity by going long on this instrument with the help of ETFs like iShares 20+ Year Treasury Bond ETF TLT, iShares 7-10 Year Treasury Bond ETF IEF, iShares Short Treasury Bond ETF SHV, iShares 1-3 Year Treasury Bond ETF SHY and iShares U.S. Treasury Bond ETF GOVT (read: Bears Grip Market: 5 Safe ETF Investing Zones).

Inverse ETFs

The virus-induced volatility is spurring demand for inverse or inverse-leveraged ETFs. These products either create a short position or a leveraged short position in the underlying index through the use of swaps, options, future contracts and other financial instruments. Due to their compounding impact, investors can earn higher returns in a shorter period of time, provided the trend remains favorable. Nonetheless, these funds run the risk of huge losses compared with traditional funds in fluctuating markets. So, investors intending to play against the tumbling Dow Jones might tap ProShares Short Dow30 DOG, ProSharesUltraShort Dow30 DXD  and ProSharesUltraPro Short Dow30 SDOW (read: Coronavirus Triggers Market Bloodbath: 7 Hot Inverse ETF Areas).

Consumer Staple ETFs

This non-cyclical sector is likely to be less hammered by any market crash. The sector can emerge as a true safe haven amid the current crisis as even people on self-quarantine need daily essentials. Investors can consider The Consumer Staples Select Sector SPDR Fund XLP, Vanguard Consumer Staples ETF VDC, iShares U.S. Consumer Goods ETF IYK and Invesco S&P 500 Equal Weight Consumer Staples ETF RHS (read: Beat Virus With 2 Sector ETFs & Stocks That Survived 2008 Crisis).

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iShares 20+ Year Treasury Bond ETF (TLT): ETF Research Reports
 
Consumer Staples Select Sector SPDR ETF (XLP): ETF Research Reports
 
iShares 7-10 Year Treasury Bond ETF (IEF): ETF Research Reports
 
Invesco S&P 500 Equal Weight Consumer Staples ETF (RHS): ETF Research Reports
 
iShares U.S. Treasury Bond ETF (GOVT): ETF Research Reports
 
Proshares Short Dow30 (DOG): ETF Research Reports
 
Vanguard Consumer Staples ETF (VDC): ETF Research Reports
 
iShares Short Treasury Bond ETF (SHV): ETF Research Reports
 
ProShares UltraPro Short Dow30 (SDOW): ETF Research Reports
 
iShares U.S. Consumer Goods ETF (IYK): ETF Research Reports
 
iShares 1-3 Year Treasury Bond ETF (SHY): ETF Research Reports
 
ProShares UltraShort Dow30 (DXD): ETF Research Reports
 
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