3 Top ETF Picks For October 2021

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September marked the first time the S&P 500 finished in the red since January as investors dealt with concerns about a slowing recovery, persistent above average inflation and a government debt crisis coming to a head in a couple weeks.

The good news is that the shakeup looks more like a cyclical rotation than an outright sell-off. Small-caps, value stocks and cyclicals have all outperformed during the past few weeks, while traditionally defensive sectors, such as utilities and healthcare, have lagged. In a sell-off scenario, you’d typically see the opposite occur, so I’m not sure that the bulls are necessarily done just yet.

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October, as I’m sure you’ll hear often if you haven’t already, is traditionally a poor month for stock returns. Whether that turns out to be the case again depends on the outcomes of the issues listed above as well as whether the Fed decides to make any changes to its taper plans.

That could make October a volatile month (especially in the bond market), but I still think there are some opportunities. If the economy gets some positive numbers from the jobs market, the debt ceiling issue can get resolved and maybe we see more modest infrastructure and spending packages that take some pressure off of the ballooning debt arguments, there’s room for equities to continue moving higher.

Here are three ETFs that I’d consider adding this month.

Amplify Transformational Data Sharing ETF (BLOK)

Bitcoin is trying to make another push above the $50,000 level, but it’s interesting that cryptos are doing fairly well despite stocks pulling back here. BLOK holds positions in three Canadian bitcoin ETFs with a total allocation of around 4%, so there’s little direct exposure to cryptos, but the fund itself tends to correlate fairly highly with bitcoin’s movements over time.

BLOK has moved mostly sideways since May, but I like how this fund is positioned if the crypto market and the fintech space pick up some additional momentum, not to speak, of course, of the huge growth potential that exists in this technology. BLOK is perhaps the best of the blockchain ETF bunch in terms of focused blockchain exposure and the actively-managed nature of the fund allows it pivot quickly to changes in the industry.

Another possible catalyst for BLOK is the rumor that the SEC could approve a bitcoin ETF in the United States as early as this month. Eric Balchunas on Twitter put the approval odds at around 75%. Adjacent industries, such as blockchain and fintech, could ride the wave of such an announcement.

SPDR S&P Dividend ETF (SDY)

I talked about this ETF just last week and compared it to some of the traditional dividend growth ETFs. In the article, I noted that “what we need for SDY is a cyclical economic recovery.” We certainly got that in a big way last week and we finally saw SDY outperform the broader market for the first time since all the way back to last spring (the fund is overweight both industrials and financials).

If the markets can navigate their way through this new two weeks where the focus will be on the debt ceiling, there’s a good chance we could see this cyclical reflation trade continue. The move higher in interest rates and the fact that the Fed looks ready to being tapering in November both add fuel to the cyclical argument. We’ve seen this type of pop in the past only to see it fizzle, so this may or may not be the long-term recovery we’ve waited for, but over the next month, I like how this fund is positioning and it could finally shake out of its 6-month funk.

Quadratic Interest Rate Volatility and Inflation Hedge ETF (IVOL)

This is a really interesting ETF that, despite having more than $3 billion in assets, may be flying under many investors’ radars. IVOL holds long positions in TIPS as well as long options tied to the shape of the U.S. interest rate curve. According to the prospectus, “the fund’s strategy is designed to hedge against inflation risk and generate positive returns from the fund’s options during periods when interest rate volatility increases and/or the U.S. interest rate curve steepens.”

The TIPS position has certainly done well in 2021 (a broad TIPS portfolio has outperformed long-term Treasuries by about 10% year-to-date). With inflation currently above 5% and looking to be less transitory by the day, investors continue laying protection on top of their portfolios. The interest rate curve has been steepening over the past month (the 10-year/3-month Treasury spread has expanded from 1.2% to about 1.5%), a condition which should benefit the long options position.

Not only has the composition of the portfolio been able to generate gains in a tough fixed income environment, the inflation and interest rate risk hedge aspect of IVOL could be especially beneficial over the next month. With the debt ceiling, inflation and labor market narratives all taking certain stage in October, risk hedging could be a smart trade.

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