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The year 2015 was fraught with uncertainty that plagued stock market returns. Unfortunately, the trend is likely to continue this year too. This is primarily thanks to persistent worries in China and an oil price collapse that has already spilled over in the New Year.  

Notably, the China turmoil has spooked the global market in the New Year. In fact, stock trading in China halted for the second day this week on concerns over the health of the world’s second-largest economy and further devaluation of the yuan. This has sparked fears of global repercussions and a capital flight (read: China Crash Spoils New Year Mood: ETFs in Focus).

Further, geopolitical tensions in the Middle East between Saudi Arabia and Iran, a strong dollar, uncertain timing of the next interest rates hike, a broad commodity slump, a weak earnings outlook, and weakness in many developed and developing economies will continue to weigh on investors’ minds throughout the year.

In such a backdrop, it is difficult to plan investments that could fetch sure-shot returns. In this case, they should focus on certain techniques or strategies while building a portfolio that are sure to pay off in the coming months. We share some of these with you:

Prepare for Higher Volatility

Markets have been highly volatile with the start of the New Year that had send indexes deep in red in the initial few days of trading. Investors should prepare themselves for more twists and turns in 2016 given the long list of worries lingering in the market. While there are many ways to survive the market turmoil, investing in lower volatility ETFs or low beta ETFs could reduce losses in declining markets while generating decent returns when the markets rise.

ETFs like PowerShares S&P 500 Low Volatility Fund (SPLV - Free Report) , iShares MSCI USA Minimum Volatility Index Fund (USMV), First Trust Low Beta Income ETF (FTLB - Free Report) and PowerShares Russell 1000 Low Beta Equal Weight Portfolio (USLB) could make compelling choices.

Bet on U.S. Small Cap ETFs

While global fundamentals are getting worse, the U.S. economy has been on a firmer footing with the Fed rate hike, which has injected enough optimism and confidence into the economy. Small caps seem to be the perfect choice when the American economy is way ahead of the others. These pint-sized stocks are free from the clutches of any global malaise and ensure higher returns than their large- and mid-cap counterparts on improving economic health (read: Is January Effect Alive in 2016? Small Cap ETFs in Play).
 
However, small cap stocks are highly volatile and could see huge losses in the crumbling stock market. As such, risk-tolerant investors with patience for extreme volatility should consider this space. For them, some of the top-ranked ETFs – iShares Russell 2000 ETF (IWM - Free Report) , Schwab U.S. Small-Cap ETF (SCHA - Free Report) , iShares Core S&P Small-Cap ETF (IJR) and Vanguard Small-Cap ETF (VB) could be excellent picks to tap the improving U.S. economy.  

Focus on Quality

After a long wait and excessive speculation, the Fed finally raised interest rates for the first time in nearly a decade, exiting the loose monetary-policy era. The initial phase of increase is actually good for stocks, as it reflects an improving economy and a lower risk of deflation. In particular, stocks that 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 tend to outperform in the rising rate environment.

Additionally, these quality stocks seek safety and protection against volatility in turbulent times. Some of the funds in this category, First Trust Dorsey Wright Focus 5 ETF (FV - Free Report) , MSCI USA Quality Factor ETF (QUAL - Free Report) , PowerShares S&P 500 High Quality ETF (SPHQ), PowerShares FTSE RAFI US 1000 Portfolio (PRF) and Barron’s 400 ETF (BFOR), are worth a look (read: Fed Finally Hikes Rates: Quality ETFs & Stocks to Buy Now).

Stay Diversified

Given high levels of uncertainty in the markets, investors should keep their portfolio well diversified with lower cost. Diversification could range between different asset classes, market caps, styles, sectors or industries and countries with the right mix of stocks only or bonds only or a combination of stocks and bonds.  

Adding globally diversified ETFslike Vanguard Total World Stock ETF (VT - Free Report) and iShares MSCI ACWI ETF (ACWI) to the portfolio could lead to optimal risk-adjusted returns for investors seeking global exposure. Vanguard Total Stock Market ETF (VTI - Free Report) could be worth a look for a domestic play, Vanguard Total Bond Market ETF ((BND - Free Report) for a bond play and Multi-Asset Diversified Income Index Fund (MDIV) offer a combo pack (see: all the World ETFs here).

Hedge Against Volatility

In the backdrop of feeble international fundamentals and steady domestic economy, investors may want to build position in the U.S. markets to take advantage of the beaten down prices. In order to exploit this trend amid market turbulence, volatility hedged ETFs could prove beneficial. These funds have the potential to stand out and outperform the simple vanilla funds in case of rising volatility. The most popular of these are PowerShares S&P 500 Downside Hedged Portfolio (PHDG - Free Report) and Barclays ETN+ S&P VEQTOR ETN (VQT - Free Report) .

Invest in Top Sectors of 2015

Health care, technology, and financials were the best performing sectors of 2015 and are likely to continue their strength this year as well. Technology and health care would remain investors’ darling when it comes to defensive trading while financials would be favored by a rising rate environment. Further, the trio has an edge over the other sectors given the encouraging industry fundamentals (read: Top Sectors of 2015 and Their Leading ETFs).

While the three sectors are crowded with a number of top ranked ETFs, the most popular are State Street funds – Health Care Select Sector SPDR Fund (XLV), Select Sector SPDR Technology ETF (XLK - Free Report) and Financial Select Sector SPDR Fund (XLF) – and Vanguard funds – Vanguard Health Care ETF (VHT), Vanguard Information Technology ETF (VGT) and Vanguard Financials ETF (VFH).
 
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