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5 Solid ETF Strategies for Second Half

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The U.S. stock market wrapped up its worst first half performance in more than 50 years. The S&P 500 and the Nasdaq 100 are in bear market at halfway 2022, declining 20.6% and 29.5%, respectively. Persistently high inflation and an economic downturn caused by a hawkish Fed have made investors jittery throughout the first half. Russia’s invasion of Ukraine added to the chaos.

With inflation soaring to a four-decade high, the Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest interest-rate increase since 1994 — and signaled continued tightening ahead, which could further weigh on stocks. This is because an increase in interest rates means higher loan rates for consumers and businesses, including mortgages, credit cards and auto loans that will likely cut consumer spending, thereby hurting economic growth. The central bank is on pace to hike rates again in July by another 75 basis points, as tracked by the CME's Fed Watch Tool.

Additionally, the latest rounds of data suggest a slowdown in economic activity in the key sectors. Mortgage rates reached their highest level in more than 13 years, while retail sales registered a bigger-than-expected drop in May as record gasoline prices prompted households to cut back on spending. Consumer confidence also dropped in June to the lowest in more than a year (read: 5 Undervalued ETFs to Buy for Second Half 2022).

Further, as the global economy is struggling with skyrocketing inflation and low growth, the World Bank has warned of a recession. The war in Ukraine, lockdowns in China, supply-chain disruptions, and the risk of stagflation may continue to hurt growth. As such, U.S. stocks have seen a weak start to the second half.

Given the current market environment, we have highlighted some investing ideas that could prove to be extremely beneficial for investors:

Bet on Rate Friendly Sectors

A rising rate environment is highly beneficial for cyclical sectors like financials, industrials and consumer discretionary. Investors seeking protection against rising rates could load up stocks in these sectors. Some of the ETFs having concentrated exposure to the particular sector are Financial Select Sector SPDR Fund (XLF - Free Report) , iShares U.S. Industrials ETF (IYJ - Free Report) and Invesco S&P SmallCap Consumer Discretionary ETF (PSCD - Free Report) . All these funds have a Zacks ETF Rank #1 or 2, suggesting their outperformance in the coming months.

Add Value to Your Portfolio

Amid a myriad of woes, value investing seems appealing to investors. This is because value stocks, which have strong fundamentals — earnings, dividends, book value and cash flow — and trade below their intrinsic value, will likely benefit from growth in the economy and simultaneously from bouts of stock market volatility (read: Can Value ETFs Continue to Outperform Growth?).

Value stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. These are less susceptible to the trending markets and their dividend payouts offer safety in times of market turbulence. While most of the funds in the value space seem excellent choices, Vanguard Value ETF (VTV - Free Report) , iShares Russell 1000 Value ETF (IWD - Free Report) and iShares S&P 500 Value ETF (IVE - Free Report) have a Zacks ETF Rank #1.

Bet on Quality

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins, and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term (read: 5 Quality ETFs to Buy Now).

Among the most popular are iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report) , Invesco S&P 500 Quality ETF (SPHQ - Free Report) and Barron's 400 ETF (BFOR - Free Report)

Focus on Low Volatility

Low-volatility ETFs have the potential to outpace the broader market in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors with a higher distribution yield than the broader markets. ETFs like iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) and Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) could be compelling choices. These have a Zacks ETF Rank #3.

Emphasis on Dividends

Dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both worlds — safety in the form of payouts and stability in the form of mature companies that are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis.

In particular, ETFs with stocks having a strong history of dividend growth seem to be good picks. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF DGRO have a Zacks ETF Rank #1.