Back to top

Image: Bigstock

5 Amazing ETF Strategies for the Fourth Quarter

Read MoreHide Full Article

After three solid quarters of 2019, Wall Street saw the worst start to the fourth quarter in about a decade with two consecutive days of decline. This is primarily thanks to the latest barrage of downbeat economic reports that point to deeper domestic troubles.

Most notably, the Institute for Supply Management’s purchasing managers index for the manufacturing sector dropped to 47.8 in September, representing the lowest level in more than a decade. Per the employment report from Automatic Data Processing, the United States added a modest 135,000 jobs in September. Average monthly job growth fell to 145,000 over the past three months from 214,000 in the year-ago quarter.

The combination of weak data came amid a persistent Sino-American dispute that has raised recessionary fears and the prospect of further tightening by the Fed. The central bank has slashed interest rates by 25 basis points (bps) each for two times in the third quarter since the financial crisis to sustain a decade-long economic expansion. Additional rate cuts might be in cards if the same trend persists and Powell pledges to "act as appropriate" to sustain the expansion (read: Top-Ranked ETFs Crushing the Market YTD).

Additionally, lingering worries about Britain’s exit from the European Union, President Donald Trump’s impeachment inquiry and geopolitical tension continued to unnerve investors. Further, this earnings season is expected to be weak with S&P 500 earnings likely to be down 4.7% from the same period last year on 4.3% higher revenues. This would follow 0.4% growth in Q2 and a flat showing in Q1.

Against such a backdrop, it is difficult to plan investments that could fetch sure-shot returns. In this case, we have highlighted some investing ideas that could prove to be extremely beneficial for investors in the fourth quarter in the current market environment:

Prepare for Volatility

Investors should prepare themselves for volatility in the fourth quarter. While there are many ways to survive the market turmoil, investing in lower volatility ETFs could reduce losses in declining markets, while generate decent returns when the markets rise. ETFs like iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) , Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) , SPDR Russell 1000 Low Volatility Focus ETF (ONEV - Free Report) and SPDR SSGA US Large Cap Low Volatility Index ETF LGLV could be compelling choices. Most of these have a Zacks ETF Rank #2 (Buy) or 3 (Hold) (read: Bet on Low-Risk ETFs for a Historically Worst September).

Focus on Quality

Quality stocks 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. These stocks thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Some of the funds in this category, MSCI USA Quality Factor ETF QUAL, PowerShares S&P 500 High Quality ETF (SPHQ - Free Report) and Barrons 400 ETF BFOR are worth a look.

Add Value to Your Portfolio

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. As such, value ETFs have the potential to deliver higher returns and exhibit lower volatility compared with their growth and blend counterparts. Among these, Vanguard Value ETF (VTV - Free Report) , iShares Russell 1000 Value ETF IWD, Vanguard Mega Cap Value ETF MGV and Vanguard Russell 1000 Value ETF (VONV - Free Report) have a Zacks ETF Rank #1 (Strong Buy) (read: How to Play Stock Rotation With Value ETFs).

Bet on Rate-Sensitive Sectors

Rate-sensitive sectors such as utilities and real estate will get a big boost from the Fed rate cuts, given their higher sensitivity to interest rates. Additionally, global headwinds will continue to raise the appeal of the stocks in these sectors. This is because these often act as a safe haven in times of market turbulence and offer higher returns due to their outsized yields. The most popular funds — Vanguard Real Estate ETF VNQ, Schwab US REIT ETF (SCHH - Free Report) , Utilities Select Sector SPDR (XLU - Free Report) , and Vanguard Utilities ETF (VPU - Free Report) — seem to be excellent choices. All these funds have a Zacks ETF Rank #3 (Hold) (read: Sector ETFs, Stocks Set to Explode After Another Rate Cut).

Focus on Dividends

The central banks across the globe are moving to easy monetary policies with interest rate cuts or launching fresh stimulus package to tackle global growth headwinds. This has sent Treasury yields down, leading to investors’ drive for higher income. While there are several dividend ETFs, here are some of the top-ranked high-yielding products — Vanguard High Dividend Yield ETF (VYM - Free Report) , iShares Core High Dividend ETF (HDV - Free Report) and SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) . VYM and SPYD have a Zacks ETF Rank #2, while HDV has a Zacks ETF Rank #1 (read: A Spread of Top Dividend Growth ETFs for Your Portfolio).

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>