We are currently in the midst of a tech crash that has sent many stocks to 52-week lows. At the time of this writing, the NASDAQ-100 was down 3% for the day and on the verge of entering a bear market. The selloff in tech stocks was widely attributed the Federal Reserve’s interest rate hikes. The hikes are expected to begin in March and may take the Fed funds rate as high as 1%. Such increases in the risk-free rate take a bite out of tech stocks, whose growth becomes less valuable when the interest rate rises.
At this point, it would be unreasonable not to expect more volatility in tech stocks. The interest rate hikes just mentioned haven’t even materialized yet, so more selling could be coming. Fortunately, there are some categories of stocks that are relatively safe in this environment. Much less interest rate sensitive than tech stocks, they have a fighting chance of coming out of this unscathed. In this article, I will explore three exchange-traded funds (ETFs) that should be able to ride out the current tech stock crash without too much damage.
BMO Covered Call Banks ETF
BMO Covered Call Banks ETF (TSX: ZWB) is a Canadian bank ETF that uses covered calls to increase its yield. Canadian bank stocks are pretty ideally suited to the economic environment we find ourselves in. Banks actually make more income off loans when rates rise, all other things being the same. Their fundamentals aren’t too heavily impacted by negative earnings surprises from tech stocks, and they may actually thrive in a high interest rate environment.
Those are two good reasons to hold banks. As for ZWB, it has another thing going for it: a very high yield from covered-call writing. According to its fact sheet, ZWB yields 5.3%. That’s a far higher yield than the underlying bank stocks themselves. By writing covered calls, ZWB’s managers earn extra income on top of the dividends the stocks pay out. If the stocks go down or stay flat, that extra income is pure profit. So, this is a great ETF to hold in a down or flat market.
iShares S&P/TSX 60 Index Fund
iShares S&P/TSX 60 Index Fund (TSX: XIU) is Canada’s most popular index fund. It tracks the TSX 60 — the 60 largest TSX stocks by market cap. The TSX 60 is mostly made up of mega-cap banks, utilities, and energy stocks, so it is fairly safe in the event of tech stock turbulence. It’s also pretty diversified — with 60 stocks, you don’t need to worry too much about individual holdings, as the unsystematic risk is diversified away.
The fund also boasts a low fee (0.16%) and a relatively high dividend yield (2.5%). That’s not a bad package of features for an index fund. More importantly, with comparatively little tech exposure, the TSX 60 should be safer in this correction than U.S. indexes.
BMO Equal-Weight Banks ETF
BMO Equal-Weight Banks ETF (TSX: ZEB) is another banking fund by BMO. This one does not use covered calls, but it does have another kind of risk protection: equal weighting. When funds are weighted by market cap, they are exposed to concentration risk — that is, the risk of top holdings underperforming. ZEB has less of this risk than the average fund, as all the stocks are held in exactly the same proportions. So, you don’t need to worry about one huge company going bust and ruining your entire portfolio — a very real risk with some funds (especially U.S. big tech funds).
