Due to increased volatility and the rising possibility of a recession, more conservative stocks are more attractive. The Vanguard High Dividend Yield ETF (NYSEARCA: VYM) contains over 400 of these companies and has performed well in recent turbulence.
The investing environment has rather suddenly become quite challenging.
It started with a sell-off in small-caps:
Micro-caps (top row, second from right) and small-caps (top row, right) both broke key trends at the beginning of the year. Both had spent the better part of 2021 consolidating gains from the post-lockdown rallies.
These sell-offs can best be viewed as equity traders changing from a risk-on to neutral policy stance in light of the then increasing and now certain hawkish turn by the Fed. This was caused by inflation running very hot:
As a result, the Fed is raising rates. In fact, three Fed Presidents are now stating they support 50 base point hikes at the upcoming meetings.
Fed President Powell:
Federal Reserve Chair Jerome Powell said the central bank is prepared to raise interest rates by a half percentage-point at its next meeting if needed, deploying a more aggressive tone toward curbing inflation than he used just a few days earlier.
Fed President Bullard:
Asked how quickly the Fed should move, Bullard said “faster is better,” adding that “the 1994 tightening cycle or removal of accommodation cycle is probably the best analogy here.”
Fed President Master:
Now bond markets are selling off sharply:
The Bloomberg Global Aggregate Index, a benchmark for government and corporate debt total returns, has fallen 11% from a high in January 2021. That’s the biggest decline from a peak in data stretching back to 1990, surpassing a 10.8% drawdown during the financial crisis in 2008. It equates to a drop in the index market value of about $ 2.6 trillion, worse than about $ 2 trillion in 2008.
This has caused a tightening of the treasury curve:
As the above chart shows, a tightening treasury market is a fairly solid sign that a recession is on the horizon.
To sum up:
- Small-caps started selling off in reaction to increased Fed hawkishness
- Rising inflation added to rate-hiking pressure
- Rising inflation has forced some Fed presidents to argue for a 50 basis point increase at upcoming meetings
- This has led to a bond market sell-off, tightening the treasury market spread,
- Which has a pretty good track record of predicting recessions.
Investors who need to maintain an equity-market exposure should consider safer investments. A good indication of safety is dividend payments, which only occur regularly if a company is large enough to have regularly available funds. These are established companies that are far more likely to withstand an economic downturn.
The Vanguard High-Dividend Yield ETF offers investors a good option.
Seeks to track the performance of the FTSE® High Dividend Yield Index, which measures the investment return of common stocks of companies characterized by high dividend yields.
The ETF has 410 holdings with total assets of $ 55.2 billion.
Here are the 10 largest holdings:
All 10 companies are some of the largest and therefore safest investments in their respective industries.
Unfortunately, the yield is only 2.75%. However, the price has held up relatively well during the latest market volatility:
The weekly chart (left) shows that prices have been mostly consolidating sideways since the start of the year. The daily chart (prices) shows that the formation is a downward sloping pennant pattern, a continuation pattern.
The VYM is still exposed to a higher level of equity market risk due to its composition. Therefore, only investors with a higher risk tolerance should consider. But the ETFs’ bias towards larger, stable, and more established companies means it’s a worthy candidate for inclusion in a portfolio that has to maintain equity positions.