Play Defensive ETFs to Counter Stock Market Slump

The December U.S. ISM Services Price Index increased to 64.4 from 58.2 in November, indicating rising inflationary pressures in the services sector. Additionally, the Job Openings and Labor Turnover Survey (JOLTS) revealed a higher-than-expected number of job openings.

The combination of rising prices and persistent job openings may lead traders to reassess their expectations for Fed rate cuts in 2025. This follows the central bank's December stance, suggesting fewer rate cuts in the near term ahead of the next meeting scheduled for Jan. 28–29.

Federal Reserve Expectations

According to CME Group’s FedWatch tool, there is a 93% probability that the Federal Reserve will keep interest rates unchanged at its January meeting. Minutes from the December meeting, due Wednesday, may provide further insight into policymakers' perspectives on the economy and inflation.

Market Reaction and Treasury Yields

U.S. Treasury yields rose on Tuesday in response to the economic data, signaling that services inflation remains stubborn. The 10-year Treasury yield climbed over seven basis points to 4.693%, reaching an intraday high of 4.699%, the highest since Apr. 26. The 2-year Treasury yield increased by more than two basis points to 4.299%.

Meanwhile, SPDR S&P 500 ETF Trust SPY, SPDR Dow Jones Industrial Average ETF Trust DIA and Invesco QQQ Trust QQQ lost about 1.1%, 0.4% and 1.8% on Jan. 7, 2025, respectively. Market volatility-measuring exchange-traded product iPath.B S&P 500 VIX Short-Term Futures ETN VXX added about 5.7% on that day.

Why to Pick Long/Short ETFs

Against this backdrop, to bypass the equity market weakness, investors may rev up their exposure to long/short ETFs. Investing in long-short ETFs seems prudent now as it offers ways to seek profits and protection simultaneously. Long-short investing strategy takes long positions in securities that are expected to gain and short positions in securities that are expected to decline.

Below we highlight a few long/short ETFs that have beaten the S&P 500 on Jan. 7, 2024.

ETFs in Focus

AGF U.S. Market Neutral Anti-Beta Fund (BTAL)

The AGF U.S. Market Neutral Anti-Beta Fund seeks to provide a consistent negative beta exposure to the U.S. equity market. The ETF has an expense ratio of 1.58% and the ETF yields 3.61% annually. The ETF was up 1.5% on Jan. 7, 2025.

Global X S&P 500 Covered Call ETF XYLD

The Global X S&P 500 Covered Call ETF seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the CBOE S&P 500 BuyWrite Index, which seeks to track the performance of a hypothetical buy-write strategy on the S&P 500 Index. The ETF charges 60 bps in fees and yields 11.46% annually. The ETF XYLD was down 0.3% on Jan. 7, 2025.

Alpha Architect 1-3 Month Box ETF BOXX

The Alpha Architect 1-3 Month Box ETF seeks to provide investment results that, before fees and expenses, equals or exceeds the price and yield performance of an investment that tracks the 1-3-month sector of the United States Treasury Bill market. The ETF charges 19 bps in fees. The ETF was up 0.01% on Jan. 7, 2025.

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