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5 ETF Strategies to Win in a Pricey Market

Sanghamitra Saha

The first half of the year 2019 may have been great for Wall Street, but volatility is looming none the less. First, a permanent solution to the ongoing U.S.-China trade crisis is not in sight right now. Then, global growth worries are there to unsettle the market’s momentum. Finally, geopolitical tensions in the Middle East are lurking to rattle investors’ mood occasionally.

Putting these concerns aside, the S&P 500 posted the best first half in 22 years, logging 17.3% gains. No wonder, U.S. stocks are pricey. With global stocks already up 16% this year, many strategists are turning cautious as worries about a weak global economy are lingering.

Morgan Stanley slashed its global equities allocation to the lowest in five years and downgraded its investment recommendation to underweight since the outlook for stocks over the next three months is downbeat. Per Morgan Stanley, profit forecasts remain too hopeful, even though global manufacturing health is lackluster. U.S. benchmark bond yields slipped to as low as 1.96% on Jul 3, while the short part of the yield curve is higher than the 10-year bond. So, some parts of the yield curve are inverted, calling for recessionary risks.

So, one has to hone in on value, dividends and quality in order to rule in the second half. However, on the positive side, we have the resumption of U.S.-China trade talks and the extension of the OPEC output cut deal. A dovish Fed as well as accommodative ECB and the Bank of Japan could propel a rally.

Against this backdrop, below we highlight a few ETF strategies that are likely to win in the second half.

Bet Big on Quality & Low-Volatility ETFs

Quality and low-volatility ETFs are relatively safe and can help investors fight the looming economic slowdown. Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, elevated margins and solid earnings growth. Equipped with these strong characteristics, quality stocks beat volatility ably.

Investors should also note that talks are rife regarding the Fed’s likely interest rate cut this year. According to Goldman Sachs, low-volatility stocks have historically delivered great performance in the 12 months following the beginning of the Fed’s rate cut cycle (read: 3 Low-Volatility Stocks & ETFs to Buy).

 iShares Edge MSCI Min Vol U.S.A. ETF USMV, SPDR MSCI USA StrategicFactors ETF QUS and iShares Edge MSCI U.S.A. Quality Factor ETF QUAL are good picks (read: Beat the Market With Quality ETFs & Stocks).

Delve Into Dividend Yields

Dividends or regular current income could save investors even if there is any capital loss. So, one can bank on these high-momentum, dividend-oriented stocks and ETFs. Vanguard High Dividend Yield ETF VYM, iShares Core High Dividend ETF HDV and O'Shares FTSE US Quality Dividend ETF OUSA are all buy-rated products.

Dividend Aristocrats: Another Winning Proposition 

Dividend aristocrats companies that have a long history of raising dividend payouts year over year. These provide hedge against economic uncertainty and are high quality in nature. In this regard, investors may choose to place their bets on stocks that have a solid dividend growth history. The Dividend Aristocrats Index has generated annualized total returns of 15.5% versus 14.3% for the S&P 500 over the last 10 years.

ProShares S&P 500 Dividend Aristocrats ETF NOBL and First Trust Rising Dividend Achievers ETF RDVY both have a Zacks Rank #2 (Buy) (read: 4 ETFs to Bet on Global Aging Population).

Q2 Earnings Outlook Poor: Bet on Exceptions

Second-quarter earnings season is about to start in two weeks and S&P 500 earnings are expected to witness a 3% year-over-year decline on 4.3% gains in revenues. Among the struggling sectors, a few show promise.

The Consumer Discretionary sector is expected to post 0.9% gains in earnings on a 12.8% revenue jump. Also, the second half of the year is loaded with celebrations like Thanksgiving and Christmas, which give discretionary stocks a boost. One can bet big on Consumer Discretionary Select Sector SPDR Fund XLY.

Play Large-Cap ETFs Irrespective of Trade War Risks

Small caps are reeling under pressure. Despite renewed tariff tensions in the second quarter, the benchmark Russell 2000 index of small companies underperformed the S&P 500, the Dow Jones and the Nasdaq.

The Russell 2000 is up about 17% year to date, still more than 8% below the record highs it reached in August 2018. On the other hand, the large-cap S&P 500 is hovering around record highs. Margin pressure is weighing on the small-cap segment. Barclay’s now estimates that small caps will post EBITDA growth of 2% this year, down from its estimate of 5.5% growth earlier this year. John Hancock Multifactor Large Cap ETF JHML and Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF GSLC are good bets in this regard.

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iShares Edge MSCI Min Vol USA ETF (USMV): ETF Research Reports
 
Vanguard High Dividend Yield ETF (VYM): ETF Research Reports
 
O'Shares FTSE US Quality Dividend ETF (OUSA): ETF Research Reports
 
SPDR MSCI USA StrategicFactors ETF (QUS): ETF Research Reports
 
iShares Core High Dividend ETF (HDV): ETF Research Reports
 
Consumer Discretionary Select Sector SPDR Fund (XLY): ETF Research Reports
 
ProShares S&P 500 Dividend Aristocrats ETF (NOBL): ETF Research Reports
 
Goldman Sachs ActiveBeta U.S. Large Cap Equity ETF (GSLC): ETF Research Reports
 
iShares Edge MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
 
John Hancock Multifactor Large Cap ETF (JHML): ETF Research Reports
 
First Trust Rising Dividend Achievers ETF (RDVY): ETF Research Reports
 
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