Best ETFs for a Volatile Market

Your Money's Worth

Best ETFs for a Volatile Market senior investing editor Kyle Woodley talks investing strategies and recommends top ETF picks for a volatile market. Also, our hosts Sandy Block and Ryan Ermey explain why teens with summer jobs should stash some money in a Roth IRA.

Episode Length: 00:27:46 | Links and resources mentioned in this episode

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Ryan Ermey: Just because the market is getting jumpy doesn't mean you have to. As major indexes decline, senior investing ditor Kyle Woodley rejoins the show to talk investing strategies and ETF picks for volatile markets in our main segment. On today's show, Sandy and I tell you why a Roth IRA is the best place to stash your money from a summer job, and a new edition of deal or no deal focuses on travel planning and housing sweepstakes. That's all ahead on this episode of Your Money's Worth, stick around.

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Ryan Ermey: Welcome to Your Money's Worth. I'm Kiplinger's associate editor Ryan Ermey, joined as always by senior editor Sandy Block. It is August, and right around this time of year was always my favorite time of year at my favorite job ever, which was the summers I spent life-guarding as a teenager, because everyone would go down the shore. As they say in Jersey, everyone goes down-

Sandy Block: Down to shore.

Ryan Ermey: ... the shore and we would spend all day playing cards and hanging out in nice weather. Did you have summer jobs?


Sandy Block: I did and I'm embarrassed to say, Ryan, that I never got past junior lifesaving. So as much as I wanted to be a lifeguard, I ended up in the concession stand-

Ryan Ermey: Oh, I see.

Sandy Block: ... at my local swimming pool, which I worked for several summers. So yes, I always had summer jobs.

Ryan Ermey: So we have some advice for either our throngs of-


Sandy Block: Teenagers.

Ryan Ermey: ... teenage listeners, but really perhaps any of our listeners who might have kids who have summer jobs.

Sandy Block: Right, it's August. So probably the ... you know, your child has wrapped up or getting close to wrapping up the summer job. And then the question is, what are you going to do with that money? And I'm sure the child has lots of really good ideas, and one of them isn't investing in a Roth IRA.

Ryan Ermey: Yeah, it's not the most exciting.

Sandy Block: But I'm going to say why this is a really good idea, and how you can actually make this a lot less painful for your child who earned some money this summer. The great thing about a Roth IRA is there's no age eligibility limit to it. If you could persuade your child to put even a few hundred dollars in a Roth, as long as you have earned income, you're eligible to contribute.


SEE ALSO: Why You Need a Roth IRA

Ryan Ermey: Correct.

Sandy Block: So if you could persuade your child even to put a few hundred dollars, you can put in $6,000 a year this year if you're under 50, but unless you were a really good lifeguard, you probably didn't make that much money. I don't know, a country club lifeguard, maybe?

Ryan Ermey: Yeah. I wasn't a country club lifeguard, but I did it at the local swim clubs, and I think I used to take home like $2,000, $2,500 or something.

Sandy Block: Okay, so that's a good starting point. So say your child made $2,000. If you put even some of that in a Roth IRA, the money grows tax free for decades until ... and it could be a substantial amount of money. Now, here's the part that I think is kind of clever -- say, your child really, really doesn't want to put this money in a Roth IRA. You could do it yourself. You could put the equivalent of the child's earned income in a Roth. The IRS doesn't care where the money comes from, as long as it doesn't exceed the contributors earned income for the year. So if your child earned $2,000 as a lifeguard, you could put $1,000, or you could offer to match. Tell your child, put in $500, I'll put in $500.


Ryan Ermey: But it can't be like a 401(k) match. They can't put in their $2,000, and you put in your $2,000. The total has to be-

Sandy Block: The total has be their earned income.

Ryan Ermey: Correct.

Sandy Block: So if they had earned income of $2,000, you could put in a thousand and they could put in a thousand, that would be the limit. But that's ... basically, that's a great way to get your child started. And the other cool thing about Roth IRAs and why we're so hard on them is they offer a lot of flexibility. Now, ideally you want your child to leave that money alone until they're 65, right? But if down the road the child has an emergency, needs new brake pads, or ends up in jail, or something like that, he needs bail money. You never know.

Ryan Ermey: You never know.

Sandy Block: You can always take out the amount that you contributed tax free and penalty free. So say you put in $2,000 this year, your child could always take out up to $2,000 without paying any taxes or penalties on the contribution. So it sort of doubles as an emergency fund in addition to a retirement savings plan. We'll put it in the show notes. There are several brokerage firms that are happy to help you set up custodial accounts for a very low or no minimums, and low fees, and we'll list them in the show notes. But I think this is definitely something to think about. It's a great way to sort of get your child on the path to financial security. It's a great way to teach them, because they can invest this money and then watch how they investments do and it is ... it'll last a lot longer than anything else they want to spend their summer money on.

Ryan Ermey: Oh, it'll last longer than their tan. I used to be so tan when I was a lifeguard. Coming up, Kyle Woodley tells you which ETFs can help you stay the course during a choppy market. Don't go anywhere.

Ryan Ermey: We're back and we're here with senior investing editor Kyle Woodley, and the topic of the day is market volatility. Kyle, what are we going to be getting into?

SEE ALSO: The 11 Best ETFs to Buy for Portfolio Protection

Kyle Woodley: Alright, so today we're going to talk not just about what's causing the recent bout of market volatility, but what you can do about it. So that's some personal dos and don'ts, but also a few picks that can help you combat this volatility.

Ryan Ermey: So what have been the main culprits? And we should note that we are recording on Wednesday the 14th of August here, so things could change by the time this comes out.

Kyle Woodley: Yeah, so the answer is that there are a lot of things, and they're very thick. So it's important to understand these when you're trying to position yourself for protection later, so try to bear with me.

Ryan Ermey: Will do.

Sandy Block: We're here for you, Kyle.

Kyle Woodley: So the longest-standing driver has been the on again off again, threat of tariffs since early 2018. Basically it's an effort for us to try to bring more U.S.-friendly trade conditions out of our trade partners, not just China, but there's also been spats with Mexico and the European union. For the better part of two years now, we've been subjected to narratives that change almost weekly about how close or far apart Washington and Beijing are on trade talks, and the market chases those stories because of the potential economic impact. So tariffs can be used for leverage, but they're problematic, because they weigh on consumers and the companies alike. In turn, that tends to drag down the overall economy. That's especially worrisome when you're talking about two major trade partners who also happen to be the world's two biggest economies. Couple that with signs of economic weakness and other areas around the world, like Europe and Southeast Asia, and you have another reason for worry.

Kyle Woodley: Then you've got the Federal Reserve and interest rates. So the Fed can lower interest rates, which makes it cheaper for consumers and companies to borrow money, and that can spark growth. But it's also in the Fed's interest to reserve that power for when it's really needed. We're in the longest period of economic expansion and in the longest bull market in America's history. So how immediate is the need to spark more economic growth, especially if you clip your ability to do so in the midst of an actual recession? It's a difficult balancing act and it's one that Wall Street keeps finding itself guessing about.

Kyle Woodley: And there's one last thing about interest rates that actually sparked today. So recently you've heard about the yield curve inverting. In short, that's when short term rates are higher than longterm rates. This indicates that investor's longterm outlook isn't good. So one particular set of rates, which is the two year treasury bond, and then the 10-year, it recently inverted, this inversion proceeded each American recession of the past half century, and only once in that time did the two and ten curve invert without a recession following.

Sandy Block: So, Kyle, as we're recording this, I think the market is down about 700 points, or maybe about 2.7% on the Dow. And that's the kind of thing that people hear about and get nervous. What kind of mistakes do investors make when markets are kind of choppy and scary like this?

Kyle Woodley: Sure. So there are two bad habits specifically. So number one is panic selling. Selling in and of itself, it's not bad. If you put your more of your portfolio into cash or even other defensive positions, those are reasonable strategies, if you're worried about volatility or a broader market downturn, especially if you're closer to retirement, and you're particularly concerned about wealth preservation. But where do you get the money to go to cash? Like, unless you're stuffing gobs of money into your account when the market is declining, you probably need to sell something, But what you shouldn't do is panic sell. That's where you just start dropping positions because you've opened up your brokerage account and you just see a big sea of big red numbers.

Ryan Ermey: Right, right, right.

Sandy Block: Oh, no!

SEE ALSO: 5 Tips to Deal With Market Volatility

Kyle Woodley: So instead, what you should actually do is when you're considering what you should sell, you actually want to look at it like you're buying it for the very first time. So do you like the company? Do you like it's business thesis? Is it trading at a fair price? Are you getting a good yield on it? And that's the one thing you have to consider from your present portfolio, because it's the yield on the cost you bought it, not at the current price. But what kind of time horizon do you have? So in other words, do you have time to wait out a recovery if you're wrong? If you'd still make that investment today, knowing what you know, then you should probably hold onto what you have.

Kyle Woodley: So another thing to avoid is buying garbage, buying dips is ... no, buying dips is a good idea. It's a tried and true investment thesis. This more so applies to people that have at least a few years to go to wait out a bad case scenario, but if the market does keep dropping, you'll eventually be presented with some attractive prices on companies that can eventually bounce back. That doesn't mean they won't drop even more in the shorter term, but you'll never ... you're not going to perfectly time the market. But if you can find high quality companies that are trading for reasonable evaluations and a better yield, thanks to a market dip, then consider buying. Just don't buy garbage, really dig into what it is you're buying. If the country enters a recession, you probably don't want to go into a formerly high flyer that's short on cash, and high on debt, no matter how cheap it seems.

Sandy Block: As our investing team likes to say, some stocks are cheap for a reason, right, Kyle?

Ryan Ermey: Right.

Kyle Woodley: That is correct.

Ryan Ermey: So you recently wrote a story on this exact subject, essentially ETFs that investors can use to protect their portfolio. And I've gotten a chance to read it, and it breaks down into a few different types of investments that are aimed at tamping down volatility, and one of them is sector ETFs.

Kyle Woodley: Sure. So just a brief note on what sector funds are. It's the most basic way to break apart the S&P 500. So, you have financial stocks, that's a sector. You have technology stocks, that's a sector. So what you want are a couple of tried and true defensive plays. So let's start with the SPDR Select Sector Utilities Fund (XLU). Utility companies are boring as all let out. You never talk about them during a bull market, but they do get popular once people start panicking, and it makes sense. So they deliver a service, so whether that's supplying energy, gas, water that you need to get by, no matter what the economy is doing. They're highly regulated. They operate almost like monopolies. So they have about as predictable a revenue base as you could want, and they typically get away with small rate hikes over time.

Kyle Woodley: Now that doesn't fuel a lot of growth, but it does let them afford typically large and growing dividends. So that'll provide some lift even if the stock itself isn't shooting higher. Of course, if you happen to be in utilities in the early stages of a bear move, then you may enjoy price upside too, because everybody else is going to start piling in for safety. So XLU is just an exchange traded fund that reduces your risk even further by spreading your investment across a couple of dozen utilities in the S&P 500.

Ryan Ermey: Sure.

Kyle Woodley: And then, there's also the SPDR Select Sector Consumer Staples Fund (XLP), and this has sort of a similar thrust. So the ETF invests in consumer staples stocks, which they're products that you and I need on a daily basis. So if the economy tanks, you're not going to go out and buy a third pair of Nike's. You're probably going to postpone the trip to Disney World. You're going to eat food.

Ryan Ermey: But you are going to buy toilet paper.

Kyle Woodley: Yup, you're going to brush your teeth and you're going to go to the bathroom. And so, that baseline need is what gives them reliable revenues and profits, which again, they often return to investors in the form of dividends. So XLP holds companies like Procter & Gamble that actually make the products, companies like Walmart that sell the products, and then there's a few sneaky holdings in there too. So, it also carries alcohol and tobacco stocks, which you think about them and you're like, well they're wants, but people treat them like needs.

SEE ALSO: The 10 Best Utility Stocks to Buy for 2019

Ryan Ermey: They're classic vice stocks, right? People don't stop smoking, and drinking, and gambling when things get bad, sometimes they do more of it.

Sandy Block: No, they do more, more. Yeah. Kyle, for those of us who are really nervous, you recommend a couple of low or minimum volatility strategies, how do these work?

Kyle Woodley: So the goal is typically the same across all of them. They're trying to provide some nebulous lower level of volatility risk. A crude way to put this is, stocks that don't move as much as the broader index. How they do it can vary a lot from fund to fund. Some just take a big group of stocks, and they weight them based on their previous volatility, so the lower the better. Others try to reduce volatility by considering different predictive factors, like profits and growth, and then they build a diversified portfolio across a bunch of sectors to basically further reduce risks.

Kyle Woodley: So one recommendation is iShares Edge MSCI Min Vol USA ETF (USMV). I'm very sorry everybody. So this is actually a pretty complicated fund, but to break it down, it takes 600 large in mid cap stocks. It identifies the ones that have lower volatility. It then weights them based on a multi-factor risk model, and then it's tweaked in a few more ways. So like, making sure that the sectors are represented within about 5% of that original index in stocks.

Ryan Ermey: Okay, since it doesn't stray too, too far on a sector basis.

Kyle Woodley: Exactly. So, a little bit difficult to understand. Something that's a little bit easier, and that'll appeal to income hunters is Legg Mason Low Volatility High Dividend ETF (LVHD). Again, so this has a couple other roles, but it's generally just looking for high and high quality dividend yielders, that also have low price and earnings volatility. And it yields a pretty nice 3.5% right now, which can act as a buffer against capital losses.

Ryan Ermey: Well Kyle, we're running up against the time limit here. Thank you so much for coming on. It's always great. It's like when Ronnie Dangerfield went on Carson, it's like the guy with treats. He has jokes, jokes, you know? You always bring the treats to the show. Excellent picks as always, and we'll be sure to link the entire list of ETFs to protect your portfolio in the show notes.

Kyle Woodley: And if people are looking for sort of a sneak preview of the other types of funds in there, in addition to the low-vol funds, and also the sector funds, there are bond options for people who do want fixed income, and then also a couple of gold plays for people who favor commodities.

Ryan Ermey: So there you go. Check it out, check out the show notes. Kyle, thank you again for coming on. What do Jimmy John's sandwiches and Keystone beer have to do with personal finance? Find out after the break.

Ryan Ermey: We're back and before we go, another edition of Deal or No Deal, and I have two things that are undeniably deals if you win them. They're sweepstakes, but I thought they would bring up an interesting sort of a topic of discussion that happened ... that comes up a lot here at Kiplinger's. So one of them is from our friends at Keystone Light.

Sandy Block: Your friends, not my friends.

Ryan Ermey: Yeah, look, I drank a lot of Keystone Light back in the day. There was a...

SEE ALSO: Bargain or Trap?

Sandy Block: The one to have, when you're having more than six, right?

Ryan Ermey: There was a liquor store in Camden, New Jersey that at the time sold a keg of Keystone for $40, so that was very much a price performer, or you get a 30 pack of cans for $12. And so obviously this ... as you would expect, this promotion is geared toward young people. If you win it, they will pay your rent for a year, or that's what they say. They'll give you a $12,000 check. So they're assuming that your rent is about a thousand dollars a month. I think it's actually over that in terms of the national average, but still quite a nice promotion. And if you come in second place, you get what they're calling an adulting transition pack, which includes-

Sandy Block: Which means you get better beer.

Ryan Ermey: Tell me if you know an adult that owns any of these, a inflatable chair, a, well I'm guessing a Keystone, shower curtain, a Hawaiian shirt, and a a candelier, which is a chandelier made out of you guessed it, beer cans. That ends September 29th. The other interesting one that I came across was from Jimmy John's, who I mean, they're giving away to the grand prize winner $250,000 toward a house, if you don't live within their delivery zone. So they will give you $250,000 toward a house in their delivery zone, so that they can ...

Sandy Block: Deliver to you.

Ryan Ermey: ... deliver you sandwiches. You know, you'll have to submit a a 250-word essay as to why you should be so lucky. And that ends October 4th. But what this brings up is for young people especially, it's a dilemma as to whether buying or renting with the help of a corporation or not, is a good idea.

Sandy Block: Is it a deal?

Ryan Ermey: Is it a deal? And it obviously all depends. I currently rent, and I have since I graduated college, and I think for people who are uncertain about if they're going to be in the same city, or with the same person, or if they're uncertain about where life is going to take them next, renting makes the most sense.

Sandy Block: Right. Because of the upfront costs, the back end costs of buying and selling a home, you hear so much ... people are always talking ... telling me, "Oh I hate to rent, because I'm just throwing that money away." But the fact of the matter is buying a house is a significant investment, and you can lose money. We've kind of lost track of that in recent years because the housing market has been so strong. But you know, go back to 2008. A lot of people got stuck with houses they couldn't afford.

Ryan Ermey: Well think about what a pain it is to break a lease when you're renting. That still doesn't compare to having to possibly sell a house and get out, like if you have to say, move for work. I could break my lease tomorrow, and it wouldn't be fun, but it would be better than me trying to sell a house on the fly. But of course, as you mentioned, buying can be a great investment, or it can be a lousy one, depending on the market where you live, when you buy, when you sell. You know, if you buy and home values go down, you may have to wait to sell it to get back the money you invested, as well as mortgage closing costs. And it usually makes sense to buy, and this is our sort of standard advice if you plan to stay in your home for five to seven years.

Sandy Block: Right, because typically that gives you time to ride out any declines in the housing market, because like the stock market, the housing market tends to move higher with some significant declines. So the general advice is, "Don't buy a house if you don't think you're going to be in the same place, or with the same person for more than five to seven years, because otherwise you're not going to get rich buying a house in most cases." And I think comparing it to an investment is a little dicey, because a house is an illiquid investment, if you buy a stock that you ... that goes bad, you can sell at a loss and move on. If you buy a house that's really declined in value, and you have to move, you still have to pay your mortgage until you can find somebody to buy it from you, and that can really put you in a bad place.

Ryan Ermey: And there are backend costs, and there's an agent's commission, and we should also know that markets in a lot of places, housing markets, still haven't climbed back to 2006 levels.

SEE ALSO: How Smart a Home Buyer Are You?

Sandy Block: Right, right.

Ryan Ermey: And the last thing to hit on, and this is something that you're going to know more about than me, is that there used to be logic regarding tax implications that came into this decision.

Sandy Block: Well and you can still deduct mortgage interest when you buy a house. What has changed is under the tax overhaul, the standard deduction was doubled, and that means that a lot of people who used to deduct interest on their mortgages aren't doing it anymore, because it makes more sense for them to claim the standard deduction. So when people say, "Well, I want to buy a house because I know I'm going to get this big tax break," that's no longer a given, and that shouldn't be what drives your decision. You shouldn't buy a house because you think you're going to save on taxes.

Ryan Ermey: So do you have a deal or no deal? And is you're sponsored by a food or a millennial targeted drink brand?

Sandy Block: No. And although I got to say one reason I might buy a house is just so I'd have a place to hang my candelier.

Ryan Ermey: Your candelier, baby.

Sandy Block: No, my deal is from our September cover story, Simplify Your Finances, and one of the stories written by our travel guru Miriam Cross called Take The Stress Out of Travel Planning, has a very fun website called a, and we'll put this in the show notes. But basically what this does, and I've had a lot of fun playing around with this. I mean, you can go anywhere on the internet and find flights and flight rates. There's a million places you can do that. This, when you put in where you are and where you want to go, it will show you multiple options, flights, bus train and driving.

Ryan Ermey: Oh wow.

Sandy Block: So even though I would go somewhere else once ... if you decide for sure you want to fly, I would go somewhere else to find, but if you just want to sort of give think about the time, and the cost of these various options, this is a really fun way to play around with your choices. I mean, you're not ... you went to San Diego recently. I mean, according to this website, it would take you 42 hours to drive there. So I think in that case, flying is the only choice. But say you're in DC, and maybe you want to go to Philly. You could drive, you could take the train, you could take the bus, or you could fly. And this kind of gives you an idea of not just the cost, but the time that it would take.

Sandy Block: And now the buses have gotten a lot nicer than they used to be, that's an option that people want to consider. The other reason I'm sort of interested in this site is that we're hearing a lot these days about people not wanting to fly either because of the cost, or because of environmental concerns.

Ryan Ermey: Sure.

Sandy Block: Some people are opting for other ways of transportation, because they want to reduce their carbon footprint. This is a good way to sort of play around with that, and it's just kind of fun to look at. I put in some pretty obscure destinations and found ways to get there.

SEE ALSO: 26 Secrets to Save Money on Travel

Ryan Ermey: I had ... I mean, I don't know if you've ever done ... I've done like these sort of planes, trains and automobiles trips before. I went ... I mean, you end up traveling for like 24 hours straight, but it can be a lot cheaper. I did ... I was in Rome ... I flew out of Rome, Fiumicino. I was going to this like rural town in Hungary, where a friend of mine was living, where he's from, I should say. And I flew from Rome to Vienna, and then caught a train across Vienna to a different train station, and then a train from there to Budapest, and a train ... a bus across Budapest to a different train station, and then a train from that other train station all the way out to where my friend lived. And so ... and I had to do that in the analog days. I mean, the interesting thing is if you're going around to Austria or whatever, people speak English, or at least German is pretty intelligible in terms of where you're going. The Magyar that you see in Hungary, it might as well be hieroglyph. So, I was pulling out maps and circling things.

Sandy Block: Well now, so you could use this website.

Ryan Ermey: Exactly.

Sandy Block: And hopefully it would tell you how to get there in all these various ways. So I just think it's kind of fun. And the thing that it does take into account too is your time. You know, if you're trying to decide between driving or taking the bus, or the train, how much time are you giving up to take another option? So I would just ... we'll put that in the show notes, but I just think it's an interesting ... as people explore different ways to get around, it's not just cost, it's also time and effort, and this kind of lays it out pretty well.

Ryan Ermey: Oh, can't wait to play with it. That'll wrap it up for this episode of Your Money's Worth for show notes and more great Kiplinger content on the topics we discussed on today's show, visit You can stay connected with us on Twitter, Facebook or by emailing us at And if you like the show, please remember to rate, review and subscribe to Your Money's Worth wherever you get your podcasts. Thanks for listening.

SEE ALSO: The Travel Tipping Quiz