Markets continue to experience turbulence following the recent ceasefire agreement in the Iran conflict, prompting investors to seek safety amid potential volatility, according to insights from Morningstar.
On Tuesday, U.S. stocks saw a dramatic surge after the U.S. announced a two-week ceasefire with Iran. This development eased fears of a worst-case scenario stemming from the ongoing conflict, particularly the prospect of escalating oil prices that could exacerbate inflation while hindering economic growth. However, the situation remains fraught, as Iran has accused the U.S. of violating the ceasefire agreement as of Wednesday evening.
As a result of these geopolitical tensions, oil prices have rebounded, hovering close to $100 per barrel following their most significant one-day decline since 2020. Traditionally considered safe havens, cash and bonds are seeing increased investment, although Zachary Evens, a passive strategies analyst at Morningstar, cautioned that this strategy might miss out on long-term portfolio growth. He emphasized that adopting a wait-and-see approach could leave investors sidelined just as markets begin to recover.
In light of the current climate, Morningstar has proposed three exchange-traded funds (ETFs) for investors to consider. These ETFs are designed to offer both short-term protection and long-term growth potential:
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iShares MSCI USA Min Vol Factor ETF (Ticker: USMV)
- Morningstar Rating: Silver
- Year-to-date Performance: +0.50%
- Thesis: Unlike many low-volatility ETFs that evaluate stocks independently, USMV aims to structure its portfolio based on the interactions among various low-volatility companies. Evens noted that while USMV may not perform as well during market rallies, its defensive strategy makes it a prudent choice in diverse market conditions.
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JPMorgan Hedged Equity Laddered Overlay ETF (Ticker: HELO)
- Morningstar Rating: Bronze
- Year-to-date Performance: -1.99%
- Thesis: This ETF integrates stocks and options in a strategy designed to smooth out market returns. It limits potential losses to approximately 5% over a three-month period. Evens highlighted that HELO has maintained 60% of the volatility of the S&P 500 while capturing just 61% of the index’s downturns since its launch two and a half years ago.
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Vanguard Short-Term Inflation-Protected Securities ETF (Ticker: VTIP)
- Morningstar Rating: Gold
- Year-to-date Performance: +1.11%
- Thesis: Described by Evens as an “ultraconservative index bond” fund, VTIP is composed of inflation-protected securities, making it an effective hedge against sudden inflation surges. He suggested that incorporating short-term TIPS into an investment portfolio can help returns keep pace with inflation without significantly increasing credit or interest rate risk.
As investors navigate this volatile landscape, Morningstar’s insights and recommended investment vehicles may offer valuable strategies for managing risk while positioning for potential growth.
