The first quarter of 2017 was great for the financial world thanks to easing policies and improving health of the economy amid bouts of volatility. This is especially true as the MSCI All-Country World Index logged in the best quarterly gain of more than 6% representing the best start to the year since 2012. Moreover, the S&P 500 notched its best three-month stretch since the fourth quarter of 2015.
Will this bullish trend continue heading into the second quarter? This is the most important question in the minds of many investors as the top priority on President Donald Trump’s agenda – his Health Care reform – collapsed after boosting optimism in the U.S. stock market. Additionally, the difference in opinion of Trump and the Congress could lead to a government shutdown on April 29 if the spending bill does not pass through. Further, fears of political instability, the French election and expensive valuation are making investors’ jittery (read: Don't Let Trump ETFs & Stocks Fool You).
Amid huge uncertainty, investors should have some strategies in place for the second quarter to safeguard themselves from any downside while simultaneously cashing in on opportunities that may crop up. Here are some strategies that could prove extremely beneficial for ETF investors in the coming months:
Prepare for Higher Volatility
As bouts of volatility will definitely play foul in the stock market, low volatility ETFs appear to be sensible choices. This is because these have the potential to outpace the broader market in bearish-to-neutral market conditions, providing significant protection to the portfolio. These funds include more stable stocks that have experienced the least price movement in their portfolio.
Adding some low volatility ETFs like PowerShares S&P 500 Low Volatility Portfolio SPLV and iShares Edge MSCI Min Vol USA ETF USMV to the portfolio could reduce losses in declining markets while generating decent returns when markets rise. Both funds have a Zacks ETF Rank of 2 or ‘Buy’ rating. Apart from this, investors could also recycle their portfolio to low beta ETFs like PowerShares Russell 1000 Low Beta Equal Weight Portfolio USLB and Fidelity Low Volatility Factor ETF FDLO for a safe exposure. USLB has a Zacks ETF Rank of 3 or ‘Hold’ rating (read: Lower Risk in Your Portfolio with These ETFs).
Emphasis on Investment Styles
Investors should seek some smart stock-selection techniques and strategies to bypass risks in the market. While there are several ways to do the same, investing in smart beta and guru ETFs could be the best way out.
The smart beta strategy helps to capture market inefficiencies in a transparent way by adding extra metrics like dividends, volatility, revenue, earnings, momentum, equal weight and other fundamental factors to the market cap or rules-based indices. It offers the best of both active and passive strategies, providing an opportunity to increase portfolio diversification, reduce risk and enhance returns over time with low cost.
On the other hand, guru ETFs replicate investing styles and predictions of market experts like Warren Buffett, Bill Ackman, Daniel Loeb, Cark Icahn and David Einhorn, providing a solid and well-diversified portfolio. These either try to clone stock investments of specialist or imitate their investing styles (read: Follow Warren Buffett With These ETF Strategies).
Some of the funds in these spaces, First Trust Dorsey Wright Focus 5 ETF (FV - Free Report) , iShares Edge MSCI USA Quality Factor ETF QUAL, PowerShares FTSE RAFI US 1000 Portfolio PRF, Global X Guru Index ETF GURU, AlphaClone Alternative Alpha ETF (ALFA - Free Report) and Direxion iBillionaire Index ETF IBLN are worth a look. PRF has a Zacks ETF Rank of 3.
Given the uncertainty in 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 top-ranked ETFs like Vanguard Total World Stock ETF VT and iShares MSCI ACWI ETF (ACWI - Free Report) 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 iShares Core Aggressive Allocation ETF AOA offer a combo pack (see: all the World ETFs here).
Bet on Mid-Caps
Investors seeking to participate in the growing economy but worried about uncertainty, should consider mid-cap stocks in the basket form. While large companies are normally known for stability and smaller ones for growth, mid caps offer the best of both worlds, allowing growth and stability simultaneously in a portfolio.
The middle-of-road securities are arguably safer options and have the potential to move higher, especially if political issues or financial instability creeps into the picture. This situation is largely expected given fears of a populist uprising in Europe and Trump’s inability to deliver on his promises (read: Trump Trade Fades: Top and Flop ETFs of Last Week).
That said, mid cap ETFs such as iShares Core S&P Mid-Cap ETF (IJH - Free Report) , SPDR S&P MidCap 400 (MDY - Free Report) , iShares S&P Mid-Cap 400 Growth ETF IJK, Vanguard Mid-Cap Growth ETF (VOT - Free Report) , iShares Russell Mid-Cap ETF IWR, andSchwab U.S. Mid-Cap ETF (SCHM - Free Report) could be ideal choices. All these funds carry a Zacks ETF Rank of 2.
Focus on International
International investing was encouraging in the first quarter and is likely to remain so given the ultra-cheap money flowing into the international economies and a weak dollar. Additionally, the Fed dovish stance has evoked enthusiasm especially in emerging markets (read: Why Did International ETFs Outperform in March?).
Among the most interesting picks, European ETFs such as FTSE Europe ETF VGK and First Trust Eurozone AlphaDEX ETF (FEUZ - Free Report) , and emerging market ETFs like Vanguard FTSE Emerging Markets ETF (VWO - Free Report) , Columbia India Small Cap ETF SCIN and iShares FTSE China 25 Index Fund (FXI - Free Report) could make for compelling choices. SCIN has a Zacks ETF Rank of 2 while the others carry a Zacks ETF Rank of 3.
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