There is no shortage of things rattling markets right now. Political uncertainty remains high with Donald Trump still in office and trade tensions continuing to flare up with on-again, off-again tariff threats.
The upcoming U.S. midterm elections add another layer of unpredictability, and geopolitical risks have also surged. As of this writing, the ongoing conflict involving the United States and Israel versus Iran has entered its 11th day, pushing oil prices above $90 per barrel.
It is easy to get caught up in headlines like these. But for long-term investors, the best approach is usually much simpler: stay diversified and stay the course. Over time, most geopolitical shocks and political cycles become little more than short-term blips on a long-term market chart.
That said, if your portfolio is heavily concentrated in a specific sector or country and you are experiencing outsized volatility, it may be worth rebalancing. Here are three Canadian exchange-traded funds (ETFs) that could help stabilize a portfolio during uncertain markets.
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Low-volatility stocks
One way to reduce portfolio swings is to focus on lower-volatility equities. Two ETFs that follow this approach are BMO Low Volatility U.S. Equity ETF (TSX: ZLU) and BMO Low Volatility Canadian Equity ETF (TSX: ZLB).
Both funds screen their portfolios for stocks with lower beta. Beta measures how sensitive a stock is to movements in the broader market. The overall market has a beta of one, while these ETFs aim to hold companies that tend to move less dramatically.
ZLU focuses on U.S. stocks and tends to overweight traditional defensive sectors such as consumer staples, healthcare, and utilities. ZLB applies a similar strategy in Canada. However, because Canada has a much smaller healthcare sector, the portfolio leans more heavily toward utilities and consumer staples with the usual financials overweight.
These ETFs are more specialized, so they do come with higher costs. ZLU charges a 0.33% expense ratio, while ZLB is more expensive at 0.79%. That said, the yields are respectable for defensive equity funds. ZLU currently yields about 1.76%, while ZLB offers around 1.89%.
Dry powder for a correction
Another often-overlooked strategy during uncertain markets is simply holding some cash. Cash gives you flexibility. It allows you to rebalance, take advantage of market dips, and reduce overall portfolio volatility.
The key is making sure that cash is still earning something rather than sitting idle. One solution is BMO Money Market Fund (TSX: ZMMK).
This ETF invests in very short-term, high-quality fixed-income instruments such as treasury bills, bankers’ acceptances, and commercial paper. The average maturity of the holdings is typically less than 90 days, which keeps price fluctuations minimal.
Right now, ZMMK yields about 2.23%, roughly in line with the Bank of Canada’s policy interest rate. As interest rates change, the yield on the fund generally adjusts along with them. The cost is also low, with a 0.13% expense ratio.
