An Investment Strategy For The Fiscal Cliff
With the election just a little over a week away, it won’t be long now until we know the results. Either Barack Obama will have another four years to continue his policies or Mitt Romney will be given an opportunity to try his hand at revitalizing the American economy.
Whatever happens, the market will be adjusting to the new political reality.
But the election is just one of two major catalysts that will impact the market in coming months. The other is the less talked about but no less significant “fiscal cliff”.
The term “fiscal cliff” refers to what will happen to the economy if the tax measures and spending cuts set for January 1, 2013 actually go into effect.
You see, unless Congress reaches some sort of compromise by the end of 2012, certain tax measures and across the board spending cuts will automatically go into effect for 2013. The result will be higher taxes and $100 billion less in government spending next year.
While these measures would help reduce the budget deficit, they are also expected to have a severely negative impact on the economy in 2013.
Just how severe?
According to the Congressional Budget Office (CBO), GDP is expected to contract by 1.3% in the first half of the year and then increase by 2.3% in the second half. Overall, GDP is projected to rise by a meager 0.5% for all of 2013.
Of course, the big fear for investors is that such a bleak growth outlook will send the stock market into a nasty tailspin.
Now, it’s entirely possible Congress will act in time to avoid sending the economy over the fiscal cliff. However, given the government’s reluctance to compromise, it would be prudent for investors to plan for the worst.
To help you do that, I’ve found an ETF to hedge your portfolio.
If the economy plunges over the fiscal cliff, there’s one thing for certain. Market volatility is going to soar. One way to protect against the harmful effects of higher volatility is to invest in a low-volatility ETF.
According to Zacks, “low volatility ETFs… are designed for investors who want to avoid volatility and limit the downside in their portfolios while staying invested in equities.” In addition, “low volatility products in general have proven their ability to deliver superior risk adjusted returns historically.”
One such ETF that I like a lot is PowerShares S&P 500 Low Volatility Portfolio (SPLV).
SPLV is made up of the 100 stocks from the S&P 500 with the lowest realized volatility over the past 12 months. The portfolio’s top holdings include such household names as Southern Company (SO), Kimberly Clark (KMB), General Mills (GIS), and Proctor & Gamble (PG) just to name a few.
The fund is highly liquid with nearly $2.5 billion in net assets and average daily volume of 993,000 shares. It offers an attractive dividend yield of 2.9%. And it carries a low expense ratio of just 0.25% per year.
What’s more, SPLV has performed well in recent months.
Year to date, the ETF is up more than 11%. And over the past 12 months, SPLV has gained an impressive 22.7%.
Take a closer look at SPLV for your own portfolio. With the economy on track to head over the fiscal cliff, now is a good time to add this low volatility stock ETF to your holdings.
Profitably Yours,
Robert Morris
Category: ETFs
