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5 Winning ETF Strategies for the Second Half

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With millions of Americans fully vaccinated and pandemic restrictions being rolled back, consumer confidence has risen, resulting in speedy economic recovery. This coupled with a massive stimulus and the return of solid earnings growth is acting as a tailwind for the stock market this year.

The combination of factors has powered activities across all sectors and categories, resulting in increased consumer spending. Americans are spending on big-ticket items such as vacations and weddings, companies are going on hiring sprees, and the transition to new technologies such as electric vehicles is accelerating (read: Will the Hot ETFs of First-Half 2021 Continue to Sizzle?).

As such, Wall Street has been enjoying a stellar ride with the S&P 500 Index logging in the second-best start to a year since 1998, behind only record gains in 2019. However, inflation fears as well as a resurgence in coronavirus cases in many parts of world will continue to unsettle the stock market in the coming months.

Given this, we have highlighted some winning strategies that could prove to be extremely beneficial for investors in the second half of 2021:

Make Trending Sectors Your Friend

The cyclical sectors, which were battered last year by the pandemic, have been on a tear this year as these are tied to economic activities and outperform when economic growth improves. The strength in cyclical stocks has led the S&P 500 to outperform this year compared to the growth and tech-laden Nasdaq Composite Index, which was the outperformer during the pandemic. The solid trend is likely to continue given the booming economy, which is growing at the fastest rate since the early 1980s, and resumption of businesses.

While most of the ETFs are beneficiaries of this trend, First Trust ISE-Revere Natural Gas Index Fund (FCG - Free Report) , SPDR S&P Retail ETF (XRT - Free Report) , First Trust NASDAQ Bank ETF FTXO and SPDR S&P Homebuilders ETF (XHB - Free Report) are the top performers this year with room for more upside. These funds have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy).

Add Value to Your Portfolio

Though growth stocks are roaring in recent months on the tech comeback from inflation fears, value is outperforming when looking from a year-to-date timeframe and will likely do so for the rest for the year. This is because value stocks, which have strong fundamentals — earnings, dividends, book value and cash flow — and trade below their intrinsic value, have been benefiting from growth in the economy and bouts of stock market volatility.

Value stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with the growth and blend counterparts. These are less susceptible to the trending markets and their dividend payouts offer safety in times of market turbulence. Given this, Vanguard Value ETF (VTV - Free Report) , iShares Russell 1000 Value ETF (IWD - Free Report) , Vanguard Mega Cap Value ETF (MGV) and Schwab U.S. Large-Cap Value ETF (SCHV - Free Report) having a Zacks ETF Rank #1 could be excellent picks (read: Value Investing Wins in 1H: 7 Best-Performing ETFs).

Prepare for Volatility

Since inflation fears and rising coronvirus cases in some parts of the world would raise volatility in the stock market, investors should focus on low-volatility ETFs. These products have the potential to outpace the broader market in bearish conditions or in an uncertain environment while providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio. ETFs like iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) and Invesco S&P 500 Low Volatility ETF SPLV could be compelling choices. These have a Zacks ETF Rank #3 (Hold).

Focus on Quality

Quality stocks are rich in value characteristics with healthy balance sheets, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These stocks thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Some of the funds in this category, MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) and Barrons 400 ETF BFOR are worth a look (read: 4 ETF Zones to Invest in As Volatility Spikes).

Emphasis on Dividends

Though dividend-focused stocks do not offer much price appreciation in a rising stock market, they offer a steady stream of income along with the potential of capital gains. These are the major sources of consistent income for investors to create wealth when returns from the equity market are at risk. The companies that pay out dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

As such, dividend-focused ETFs offer safety in the form of payouts and stability in the form of mature companies that are less volatile to large swings in stock prices. While there are several dividend ETFs, here are some of the top-ranked, high-yielding products — Vanguard High Dividend Yield ETF (VYM - Free Report) , iShares Core High Dividend ETF (HDV - Free Report) and SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) . The trio has a Zacks ETF Rank #1 or 2.

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