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Volatility has been the catchword in the broader equity market since the start of the year, thanks to global growth slowdown, vulnerability in the otherwise-improving U.S. economy and the yet unseen Brexit fallout.
With each of the threats palpable in the second half, along with uncertainty emanating from the presidential election in November, investors might be clueless about the future movement and apprehensive of more corrections lurking ahead (read: Beat Brexit-Induced Sell-Off via These Inverse ETFs).
Agreed, equities saw a solid start to Q3 powered by solid U.S. job and manufacturing data for the month of June and hints of further stimulus launches in several corners of the globe to fight the Brexit fallout and persistent economic lull.
But otherwise nothing much has been constructive in the investing backdrop lately. Most market watchers were neutral-to-bearish in recent weeks. In such a scenario, the formulation of investing strategies for 2H16 – which appears to be another jittery half – seems warranted.
Go Defensive
Courtesy of worries over the Brexit contagion, many investors may turn cynical about the safety of their portfolio. For them, defensive ETFs seem intriguing. In this pack, there are long/short ETFs like U.S. Market Neutral Anti-Beta Fund (BTAL - Free Report) and low volatility ETFs like PowerShares S&P International Developed Low Volatility Portfolio ETF (IDLV - Free Report) .
S&P 500 to Pull Back Ahead? Seek High Quality Exposure
S&P 500 hit all-time highs lately after the post Brexit sell-off, but this probably does not mean that the index will not pull back ahead, especially given a myriad of woes that are lurking. As per an article by barrons.com “since 1950, there have been 27 years where a new 52 Week High was achieved in July. The average pattern over the next three months showed that the new high momentum fizzled into a sideways trading.”
The Fed already pointed to the overvaluation in U.S. stocks. Even Goldman Sachs is not bullish about it. The research house recently expected as much as a 10% slide in the S&P 500 this year. Its recent view on stocks is neutral on both the three- and 12-month frames, though the agency feels that further rally in stocks will lower the risk quotient in that segment.
One way to play the likely pullback is to tap inverse ETFs like Short S&P500 ETF (SH). Another way is to buy ETFs, consisting of stocks with a stable outlook or dividend growth. Such products are Flexshares Quality Dividend Defensive Index FundQDEF, iShares Core Dividend Growth ETF DGROand S&P 500 Dividend Aristocrats ETF NOBL.
Bonds Beyond Boundaries: Tap Aggregate Bond ETFs
Bonds are on a tear with record low yields for most part of the developed world. Against this backdrop, safe resorts – U.S. Treasury ETFs – are surely good options; but why not trying safe options with relatively higher yield.Investors should note that Goldman is underweight on government bonds on a 12-month frame, but has a neutral outlook with a three-month view (read: Top Performing Bond ETFs of 1H)?
Investors can thus park their money in aggregate bond ETFs like Vanguard Long-Term Bond ETF BLV, iShares Core 10+ Year USD Bond ETF ILTBand PowerShares CEF Income Composite Portfolio ETF PCEF.
Exposure to the entire fixed-income spectrum – investment grade to high-yield or government to corporate –gives investors a chance to quench their thirst for yields as well as guard their portfolios from heightened market turbulence. BLV, ILTB and PCEF yield 3.77%, 2.97% and 8.39%, respectively.
Investors having a strong stomach for risks, can also tap high yield bond ETFs like SPDR Barclays Capital High Yield Bond ETF (JNK - Free Report) (especially given the energy sector rebound) or PowerShares Emerging Markets Sovereign Debt Portfolio ETF (PCY - Free Report) .
Drive for Dividends
Dividend ETFs will be on the move as current income is the need of the hour given extremely low levels of U.S. Treasury yields. PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF(SPHD - Free Report) and Vanguard High Dividend Yield ETF (VYM - Free Report) can be the destinations of this drive.
Play Smaller-Cap U.S. Stocks?
Since the global investing backdrop is likely to be vulnerable ahead as the Brexit procedure progresses, an aversion from large-caps seems warranted. Now, if the U.S. economy gives positive cues, investors should try out smaller-cap U.S. stocks as this capitalization is largely tied to the domestic economy. WisdomTree SmallCap Dividend Fund (DES - Free Report) could be a great choice for this.
And if any loss of momentum is noticed in the economy, mid-caps will turn out as better options as these securities offer the best of the both the worlds – large and small-cap stocks. For this spectrum, WisdomTree MidCap Dividend Fund (DON - Free Report) and Vanguard Mid-Cap Value ETF (VOE - Free Report) could be intriguing options (read: Mid-Cap ETFs to Take Lead Ahead?).
Is Gold Too Swarming? Try Silver Then
As the mantra of 2016 investing has so far been safety, gold cashed in on it greatly. This safe-haven metal has been over the $1,300 level right now. At this juncture, there are analysts who believe this mad rush will eventually lose pace and gold will come back to $1,200–$1,250 by the end of the year, though there are analysts who expect gold to hit $1,425 an ounce by the end of Q3 (read: Silver or Gold ETFs: Which is The Best Bet for July?).
So, you can either play gold ETFs like (GLD - Free Report) or (IAU - Free Report) with a short-termview or can tap its low-priced cousin silver ETFs. Investors should note that the gold/silver ratio has slumped to the lowest level since September 2014, indicating silver’s potential strength over gold. Though silver joined the precious metal rally a little later than gold, its investments are presently on cloud nine.
Investors should note that if the U.S. economy comes up with sturdy readings, the dollar will strengthen and may put pressure on broad-based commodities along with gold. But since silver has considerable usage in industrial activities, a recovering economy may continue to push silver ETFs like iShares Silver Trust (SLV - Free Report) higher.
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ETF Strategies for 2H
Volatility has been the catchword in the broader equity market since the start of the year, thanks to global growth slowdown, vulnerability in the otherwise-improving U.S. economy and the yet unseen Brexit fallout.
With each of the threats palpable in the second half, along with uncertainty emanating from the presidential election in November, investors might be clueless about the future movement and apprehensive of more corrections lurking ahead (read: Beat Brexit-Induced Sell-Off via These Inverse ETFs).
Agreed, equities saw a solid start to Q3 powered by solid U.S. job and manufacturing data for the month of June and hints of further stimulus launches in several corners of the globe to fight the Brexit fallout and persistent economic lull.
But otherwise nothing much has been constructive in the investing backdrop lately. Most market watchers were neutral-to-bearish in recent weeks. In such a scenario, the formulation of investing strategies for 2H16 – which appears to be another jittery half – seems warranted.
Go Defensive
Courtesy of worries over the Brexit contagion, many investors may turn cynical about the safety of their portfolio. For them, defensive ETFs seem intriguing. In this pack, there are long/short ETFs like U.S. Market Neutral Anti-Beta Fund (BTAL - Free Report) and low volatility ETFs like PowerShares S&P International Developed Low Volatility Portfolio ETF (IDLV - Free Report) .
S&P 500 to Pull Back Ahead? Seek High Quality Exposure
S&P 500 hit all-time highs lately after the post Brexit sell-off, but this probably does not mean that the index will not pull back ahead, especially given a myriad of woes that are lurking. As per an article by barrons.com “since 1950, there have been 27 years where a new 52 Week High was achieved in July. The average pattern over the next three months showed that the new high momentum fizzled into a sideways trading.”
The Fed already pointed to the overvaluation in U.S. stocks. Even Goldman Sachs is not bullish about it. The research house recently expected as much as a 10% slide in the S&P 500 this year. Its recent view on stocks is neutral on both the three- and 12-month frames, though the agency feels that further rally in stocks will lower the risk quotient in that segment.
One way to play the likely pullback is to tap inverse ETFs like Short S&P500 ETF (SH). Another way is to buy ETFs, consisting of stocks with a stable outlook or dividend growth. Such products are Flexshares Quality Dividend Defensive Index Fund QDEF, iShares Core Dividend Growth ETF DGRO and S&P 500 Dividend Aristocrats ETF NOBL.
Bonds Beyond Boundaries: Tap Aggregate Bond ETFs
Bonds are on a tear with record low yields for most part of the developed world. Against this backdrop, safe resorts – U.S. Treasury ETFs – are surely good options; but why not trying safe options with relatively higher yield. Investors should note that Goldman is underweight on government bonds on a 12-month frame, but has a neutral outlook with a three-month view (read: Top Performing Bond ETFs of 1H)?
Investors can thus park their money in aggregate bond ETFs like Vanguard Long-Term Bond ETF BLV, iShares Core 10+ Year USD Bond ETF ILTB and PowerShares CEF Income Composite Portfolio ETF PCEF.
Exposure to the entire fixed-income spectrum – investment grade to high-yield or government to corporate – gives investors a chance to quench their thirst for yields as well as guard their portfolios from heightened market turbulence. BLV, ILTB and PCEF yield 3.77%, 2.97% and 8.39%, respectively.
Investors having a strong stomach for risks, can also tap high yield bond ETFs like SPDR Barclays Capital High Yield Bond ETF (JNK - Free Report) (especially given the energy sector rebound) or PowerShares Emerging Markets Sovereign Debt Portfolio ETF (PCY - Free Report) .
Drive for Dividends
Dividend ETFs will be on the move as current income is the need of the hour given extremely low levels of U.S. Treasury yields. PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF(SPHD - Free Report) and Vanguard High Dividend Yield ETF (VYM - Free Report) can be the destinations of this drive.
Play Smaller-Cap U.S. Stocks?
Since the global investing backdrop is likely to be vulnerable ahead as the Brexit procedure progresses, an aversion from large-caps seems warranted. Now, if the U.S. economy gives positive cues, investors should try out smaller-cap U.S. stocks as this capitalization is largely tied to the domestic economy. WisdomTree SmallCap Dividend Fund (DES - Free Report) could be a great choice for this.
And if any loss of momentum is noticed in the economy, mid-caps will turn out as better options as these securities offer the best of the both the worlds – large and small-cap stocks. For this spectrum, WisdomTree MidCap Dividend Fund (DON - Free Report) and Vanguard Mid-Cap Value ETF (VOE - Free Report) could be intriguing options (read: Mid-Cap ETFs to Take Lead Ahead?).
Is Gold Too Swarming? Try Silver Then
As the mantra of 2016 investing has so far been safety, gold cashed in on it greatly. This safe-haven metal has been over the $1,300 level right now. At this juncture, there are analysts who believe this mad rush will eventually lose pace and gold will come back to $1,200–$1,250 by the end of the year, though there are analysts who expect gold to hit $1,425 an ounce by the end of Q3 (read: Silver or Gold ETFs: Which is The Best Bet for July?).
So, you can either play gold ETFs like (GLD - Free Report) or (IAU - Free Report) with a short-termview or can tap its low-priced cousin silver ETFs. Investors should note that the gold/silver ratio has slumped to the lowest level since September 2014, indicating silver’s potential strength over gold. Though silver joined the precious metal rally a little later than gold, its investments are presently on cloud nine.
Investors should note that if the U.S. economy comes up with sturdy readings, the dollar will strengthen and may put pressure on broad-based commodities along with gold. But since silver has considerable usage in industrial activities, a recovering economy may continue to push silver ETFs like iShares Silver Trust (SLV - Free Report) higher.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>