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5 Winning ETF Ideas for Your Portfolio in 2023

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After incurring the biggest annual loss since 2008 and the first yearly fall since 2018, Wall Street staged a solid rebound to start 2023. Easing inflation and hopes of the Fed’s slower rate hike following a weak jobs report rekindled investors’ interest in riskier assets.

Inflation is easing and consumer confidence is rising, reflecting that the stock market will likely move higher. The latest job report has added to the strength. The U.S. added 223,000 jobs in December and the unemployment rate fell to 3.5%, matching a 50-decade low. Meanwhile, wage growth lost momentum, which gave investors hope that the Fed could ease off on its interest-rate increases. All these factors should lift stocks higher.

However, recession fears, the continued war in Ukraine and a slowdown in China continued to weigh on stocks. The International Monetary Fund warned that a third of the global economy would be in a recession this year given no signs of abatement of the ongoing conflict in Ukraine, spiraling inflation, higher interest rates and a surge in coronavirus infections in China. The year 2023 will be "tougher" than last year as the United States, European Union and China will see their economies slow down (read: Invest in Defensive ETFs as Recession Fear Grows in 2023).

Given the current market environment, we have highlighted some investing strategies 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 (Strong Buy) or 2 (Buy), suggesting their outperformance in the coming months (read: Consumer Confidence Rebounds in December: ETFs to Buy).

Add Value to Your Portfolio

Amid myriad 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.

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.

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. USMV has a Zacks ETF Rank #3 (Hold) and SPLV has a Zacks ETF Rank #2.

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 (read: 5 Cheap Dividend ETFs to Buy and Hold for 2023).

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.
 

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