The Federal Reserve raised the benchmark interest rates by 75 basis points yesterday to bring down high inflation levels. The Fed interest rate hikes so far and the potential of further hikes this year could mean a slowing economy, as borrowing costs are rising steadily.
Furthermore, the economy has already met the standard recession definition with two consecutive quarters of negative GDP readings. The economy contracted at a 0.9% annual rate in the second quarter after a 1.6% decline in the first quarter.
Credit Suisse analysts forecasted that the probability of the United States being in recession 6 and 12 months ahead is nearly 25%. “Inverting yield curves, rising inflation, weakening housing data, and slumping surveys have all driven the increase in recession probability,” they wrote in a research note.
Investors should opt for defensive ETFs to protect their portfolios amid the risk-off environment. Thus, defensive ETFs ProShares Short High Yield ETF (SJB), BlackRock Short Maturity Municipal Bond ETF (MEAR), and VanEck Short Muni ETF (SMB) could be solid additions to one’s portfolio now.
ProShares Short High Yield ETF (SJB)
SJB offers daily inverse (-1x) exposure to a modified market-value-weighted index that comprises US-dollar-denominated corporate high-yield bonds with maturities ranging between 3 and 15 years. High-yield bonds, just a euphemism for junk bonds, fall into an asset class that generally delivers high expected returns and features the considerable risk of default.
SJB tracks the iBoxx $ Liquid High Yield Index. It has an expense ratio of 0.95% compared with the category average of 0.98%. The fund has a total of four holdings. Its principal holdings include the U.S. dollar with 34.09% weighting, followed by the United States Treasury Bills 0.0% 22-SEP-2022,11-AUG-2022, and 13-SEP-2022 with 32.92%, 19.81 and 13.18% weighting, respectively.
SJB has $375.70 million in assets under management. Over the past six months and past year, its fund flows came in at $299.92 million and $299.93 million, respectively. It has a beta of negative 0.37.
The fund has gained 4.3% over the past six months and 7.3% year-to-date to close the last trading session at $18.71. It has a NAV of $18.71.
SJB's strong fundamentals are reflected in its POWR Ratings. The ETF has an overall rating of B, which equates to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
SJB has a grade of A for Buy & Hold and B for Trade and Peer. The fund is ranked #2 among 20 ETFs in the Inverse Bonds ETFs group. To access all POWR Ratings for SJB, click here.
BlackRock Short Maturity Municipal Bond ETF (MEAR)
MEAR holds a portfolio of actively managed municipal bonds. With a target portfolio maturity of three years or less, this ETF is considered a valuable cash management tool for non-tax-advantaged accounts. So, the active manager aims to provide current tax-exempt income through a portfolio of investment-grade, AMT-free, short-term municipal securities.
Given its active approach, MEAR’s exposure can change rapidly. So, investors should monitor the fund’s holdings.
MEAR has an expense ratio of 0.25% compared with the category average of 0.30%. It has a total of 160 holdings. The fund's top holdings include Michigan St Hsg Dev Auth Rent Hsg Rev VAR 01-ARP-2062 with 3.13% weighting, Mississippi Business Fin Corp Miss Gulf Opportunity Zone VAR 01-DEC-2030 with 2.61% weighting and U.S. Dollar with 2.57%.
MEAR has assets under management of a total of $385.80 million. Its fund flows came in at $89.46 million over the past six months and $109.51 million over the past year. It has a beta of 0.01.
The fund pays a $0.14 annual dividend, yielding 0.60% at the prevailing share price. Also, it has paid dividends for seven consecutive years. MEAR has gained marginally over the past month to close the last trading session at $49.81. It has a NAV of $49.80.
MEAR’s POWR Ratings reflect a strong outlook. The ETF has an overall A grade, equating to Strong Buy in our proprietary rating system.
MEAR has an A grade for Peer, Trade, and Buy & Hold. The fund is ranked #10 among 66 ETFs in the A-rated Municipal Bonds ETFs group. To access all MEAR ratings, click here.
VanEck Short Muni ETF (SMB)
SMB tracks an index that aims to provide marketlike exposure to short-duration, tax-exempt municipal bonds with maturities of no more than six years. The fund uses a sampling method to track the index, which means it will invest in a sample of securities that collectively have an investment profile like the underlying index.
Moreover, SMB is considered a solid choice for investors seeking broad exposure to the municipal market but with relatively lower levels of risk.
SMB tracks the ICE Short AMT-Free Broad National Municipal Transition Index. It has an expense ratio of 0.20% compared with the category average of 0.30%. The ETF has assets under management of a total of $371.20 million. Its fund flows came in at $47.36 million over the past six months and $77.90 million over the past year. It has a beta of 0.06.
SMB has a total of 613 holdings. The fund's top holdings include Conroe Tex Indpt Sch Dist 5.0% 15-FEB-2027 with 0.62% weighting, North Carolina Tpk Auth Triangle Expwy Sys Rev 5.0% 01-FEB-2024 with 0.60%, followed by Maryland St 5.0% 15-MAR-2028 and Metropolitan Transn Auth N Y Rev VAR 15-NOV-2048 with 0.60% and 0.57%, respectively.
The fund pays a $0.22 annual dividend, which yields 1.43% at the prevailing share price. Its dividend payouts have increased at a 2.1% CAGR over the past five years. It has gained 0.8% over the past month to close the last trading session at $17.14. Also, it has a NAV of $17.15.
SMB's strong outlook is reflected in its POWR Ratings. The ETF has an overall rating of A, which translates to Strong Buy in our proprietary rating system.
SMB has an A grade for Trade and Buy & Hold Grade. It has a grade of B for Peer. Among the 66 ETFs in the A-rated Municipal Bonds ETFs group, it is ranked #11. To get all the POWR Ratings for SMB, click here.
SJB shares were trading at $18.60 per share on Thursday afternoon, down $0.11 (-0.59%). Year-to-date, SJB has gained 6.76%, versus a -14.30% rise in the benchmark S&P 500 index during the same period.
About the Author: Mangeet Kaur Bouns
Mangeet’s keen interest in the stock market led her to become an investment researcher and financial journalist. Using her fundamental approach to analyzing stocks, Mangeet’s looks to help retail investors understand the underlying factors before making investment decisions.
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