Low-Beta ETFs Step Into The Spotlight As JPMorgan Flags Crowded AI Trades
As turbulence reemerges in the U.S. stock market, ETFs designed to dampen volatility are finding fresh relevance.
According to JPMorgan strategists, "extreme crowding” in speculative growth and second-order AI stocks has pushed risk to uncomfortable levels. This sets the stage for a kind of rotation that low volatility ETFs, or ETFs with beta less than 1, are engineered to tap.
Names that are likely to be prone to strong reversals if broader market conditions worsen, as flagged by JPMorgan, are Broadcom Inc (NASDAQ:AVGO), Advanced Micro Devices Inc (NASDAQ:AMD), Estee Lauder Companies Inc (NYSE:EL), Invesco Ltd (NYSE:IVZ), Expedia Group Inc (NASDAQ:EXPE), and Nucor Corp (NYSE:NUE), as reported by Bloomberg. Many of these stocks have declined significantly since the start of this month, adding to concerns that momentum trades are reversing.
For ETF investors, the message is less about abandoning equities and more about changing how exposure is expressed. The alternative solution JPMorgan prefers is less-volatile, cash-producing stalwarts, which translate well into low-volatility ETFs.
Funds such as the Invesco S&P 500 Low Volatility ETF (NYSE:SPLV), with beta of 0.61, and iShares MSCI USA Min Vol Factor ETF (BATS:USMV), with beta of 0.76, explicitly demonstrate a tilt towards stocks with lower historical variability in market prices. These funds lean more and more towards the healthcare, consumer staples, utilities, and telecommunication sectors and include names such as Cigna Group (NYSE:CI), Pfizer Inc (NYSE:PFE), and Verizon Communications Inc (NYSE:VZ), identified by JPMorgan to have a favorable risk/reward profile during this period.
Unlike momentum or growth ETFs, which can become crowded in strong rallies, low-volatility ETFs rebalance portfolios based on risk-based measures rather than on momentum. This makes it even more attractive in narrow leadership cycles, when investors begin to question valuations in beta-rich corners of the stock market.
Dividend-based ETFs such as the Vanguard Dividend Appreciation ETF (NYSE:VIG) or the Schwab U.S. Dividend Equity ETF (NYSE:SCHD) are also gaining popularity, providing income as well as the benefits of lower volatility. The ETFs carry betas of 0.84 and 0.74, respectively, according to Benzinga Pro. This is another way to stay invested while reducing risk.
The move does not necessarily mean the end of the AI trade. Rather, it signifies growing selectivity among investors, who understand that not all AI-linked stocks can command a high multiple. Low-volatility ETFs enable investors to remain in the equity markets without taking positions in the most crowded areas.
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