After a bumpy ride in the first half of the year, global stocks are bouncing back, with iShares MSCI ACWI ETF (ACWI - Free Report) , which targets the global stock market, up 1% last week. The U.S. stocks, as indicated by SPDR S&P 500 ETF (SPY - Free Report) , which tracks the S&P 500 index, is up 1.5% to start the second half versus 0.6% gain for Vanguard FTSE All-World ex-US ETF VEU, which targets the international equity market excluding the United States.
With a strengthening economy, historic tax cuts, record employment, surging corporate profits and rising oil price, the stock market fundamentals never look better than this. But uncertain trade policies will continue to weigh on the stocks. This is especially true as the United States and China slapped tit-for-tat duties on $34 billion of each other’s exports on Jul 6 after months of rhetorical tariff threats. Beijing accusing Washington of triggering the "largest-scale trade war (read: Tariff Threats Become Reality, Add 6 ETFs to Your Arsenal).”
Though investors’ shrugged off this initial round of trade war, the worst is yet to come. Tariffs on another $16 billion worth of Chinese goods are expected to go into effect in two weeks. And if Beijing retaliates, Trump has threatened additional tariffs on $500 billion in Chinese goods. If the situation worsens and turns out to be a full-blown trade war, it would spell disaster for the global stock markets, at least in the near term.
Given this, we have highlighted some strategies that could prove extremely beneficial for investors in a choppy market:
Make Hot Sectors Your Friend
Biotech and technology are the top two outperformers in the current turmoil. The biotech sector is getting a dual boost from its non-cyclical nature, which provides a defensive tilt to the portfolio in a turbulent market, and a favorable regulatory backdrop. Meanwhile, the technology surge is fueled by FAANG stocks and other big giants that are largely immune to trade and tariffs given their leadership and strength in key industries. Additionally, the first round of tariffs does not include products such as mobile phones or televisions. Instead, it targets products that are part of the "Made in China 2025" industrial policy.
Some of the top-ranked ETFs that are surging lately could be excellent picks. These include Virtus LifeSci Biotech Clinical Trials ETF (BBC - Free Report) , First Trust NYSE Arca Biotechnology Index Fund (FBT - Free Report) , SPDR S&P Software & Services ETF (XSW - Free Report) and Invesco S&P SmallCap Information Technology ETF (PSCT - Free Report) . These funds have Zacks ETF Rank #2 (Buy).
Prepare for Higher Volatility
As trade war fears will definitely play foul in the stock market, low-volatility or low-beta 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.
ETFs like iShares MSCI USA Minimum Volatility Index Fund USMV, Invesco S&P 500 Low Volatility ETF SPLV, First Trust Low Beta Income ETF FTLB and Invesco Russell 1000 Low Beta Equal Weight ETF USLB could be compelling choices (read: Renewed Trade Spat Grips Market: 6 ETF Buying Zones).
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, revenues, 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 specialists or imitate their investing styles (read: A Spread of ETFs to Mimic Hedge Fund Ideas).
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, Invesco FTSE RAFI US 1000 Portfolio PRF, Global X Guru Index ETF GURU, AlphaClone Alternative Alpha ETF (ALFA - Free Report) and Direxion iBillionaire Index ETF are worth a look. PRF has a Zacks ETF Rank of 3.
Bet on U.S. Small Caps
Small-cap stocks are less vulnerable to political issues and could better insulate investors from the ongoing trade war fears. Additionally, these pint-sized stocks tend to outperform on improving economic fundamentals given their less international exposure and higher revenues from the domestic market.
While the space is crowded with a number of top-ranked ETFs, honing in on growth products could lead to higher returns. iShares Russell 2000 Growth ETF (IWO - Free Report) , Vanguard Small-Cap Growth ETF (VBK - Free Report) , iShares S&P Small-Cap 600 Growth ETF (IJT and SPDR S&P 600 Small Cap Growth ETF SLYG saw their rank surge to the top hierarchy in the latest rank update and could thus outperform (read: 6 Small-Cap ETFs That Have Surged to #1 Rank in Summer).
Safeguard Your Portfolio With Value Picks
Value ETFs have proven to be outperformers over the long term and are less susceptible to trending markets. This is because value stocks have strong fundamentals — earnings, dividends, book value and cash flow — that trade below their intrinsic value and are undervalued. Among these, the most popular are iShares Russell 1000 Value ETF IWD, Vanguard Value ETF (VTV - Free Report) and iShares S&P 500 Value ETF IVE. These funds have a Zacks ETF Rank #3 (read: Top ETF Events of 1H to Watch in 2H).
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