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US Economy in "Late-Cycle" Phase? ETFs to Play

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The year 2020 should begin on a strong note for the global market thanks to easing in trade tensions and monetary policies. Per Morgan Stanley, “trade tensions and monetary policy are easing in tandem for the first time in seven quarters” with as many as 20 out of 32 central banks that Morgan Stanley tracks cutting interest rates currently.Other key central banks like Bank of Japan has been maintaining ultra-easy monetary policy, if not slashing further (read: Play Global Bond ETFs to Join Central Banks' Rate Cut Euphoria).

A wave of cheap money inflows in international markets and low rates should drive global markets in 2020. But then, security valuation and business cycle come into play which decide the market momentum and portfolio positioning.

Is U.S. Economy Really in Late-Cycle Recovery?

Morgan Stanley expects real GDP growth in the United States, which is “clearly in late-cycle,” will decline from 2.3% in 2019 to 1.8% in 2020. This is especially true given the economic expansion traveled a decade to become the longest ever and the S&P 500 has offered a compounded return of about 18% a year since the nadir of March 2009 (read: 10-Year Bull Market to Rage Ahead in 2019: 10 ETF Bets).

Some economic characteristics now match with the late-cycle traits. A 50-year low unemployment rate, downtrend in consumer confidence, which had previously touched a cycle peak and slide in some key economic indicators from their highs are some examples. Ballooning corporate debt, shrinking earnings from historic highs and hefty equity valuations are other features. Buybacks have been a major source of stock-market demand this year like most late-cycle phase.

But then late-cycle recovery is normally marked with the tightest fiscal and monetary policy, which has not been the case in 2019. In 2020 too, we are less likely to see any tightening, if not further easing. Households are not head over heels in debt this time unlike last recession. The housing market is benefiting from supply-demand dynamics that is basically a representative of an early cycle environment, per analysts. As a result, some economists and analysts prefer to term the current scenario as “mini-reflation wave within an ongoing late cycle.” In short, several economic features are giving cues of a mid-cycle recovery too.

ETF Picks

Against this backdrop, below we highlight a few ETF picks that could be apt for the current scenario.

Invesco S&P 500 Quality ETF SPHQ

The underlying S&P 500 Quality Index tracks the performance of stocks on the S&P 500 Index that have the highest quality score, which is calculated based on three fundamental measures, return on equity, accruals ratio and financial leverage ratio. The fund charges 15 bps in fees (read: Why You Should Bet On Quality ETFs Now).

Nuveen ESG Mid-Cap Growth ETF NUMG

The underlying TIAA ESG USA Mid-Cap Growth Index comprises equity securities issued by mid- capitalization companies listed on U.S. exchanges. It uses a rules-based methodology that provides investment exposure that generally replicates that of mid-cap growth benchmarks through a portfolio of securities that adhere to predetermined ESG, controversial business involvement and low-carbon screening criteria.

Technology and Industrials sectors take about 50% of the fund. Mid-cap stocks have decent exposure to both domestic and international markets and thus emerge as winning bets in the current scenario.

Technology Select Sector SPDR Fund XLK

Information technology, especially the semiconductors and hardware corners, stand to gain currently on U.S.-Sino deal hopes. Also, holiday optimism is expected to drive tech stocks higher in the coming days thanks to a surge in buying of tech stuffs. The sector, in any case is hovering around an all-time high (read: 5 Solid Tech ETFs to Buy for Christmas).

Vanguard High Dividend Yield ETF (VYM - Free Report)

As investors started to foresee signs of an economic slowdown, a defensive approach becomes essential for their portfolio. The past decade was especially favorable for dividend ETFs as central banks, including the Fed, have been ultra-dovish. The fund yields 3.01% annually. Such good yields cover up for capital losses to a large extent, if there is any (read: Fed to Not Hike Rates in 2020: ETF Areas to Shine).

Invesco DWA Healthcare Momentum ETF PTH

At one hand, healthcare is a good bet for late-cycle recovery and the sector is on high momentum on the other. Solid M&N activities, positive drug data and solid FDA approvals have been driving the space in recent months (read: Healthcare Drives Wall Street: 5 Soaring ETFs & Stocks).

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