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How to Build a Winning ETF Portfolio Amid Trade War Fears

Kinder Morgan (KMI) reported earnings 30 days ago. What's next for the stock? We take a look at earnings estimates for some clues.

The global stock market has been on a bumpy ride given fears of a global trade war that has kept investors’ on the edge. This is especially true in the wake of escalating tariff talks between the United States and its major allies, especially China.

However, economic fundamentals remained sound given the raft of upbeat data, which shows that the economy is piping hot with unemployment dropping to 3.8% — the lowest level since 2000, consumer spending and confidence on the rise, and a retail sales rebound (read: Fund Managers Bullish on America in June: 6 ETFs to Profit).

Further, a massive $1.5-trillion tax cut will create an economic surge, boosting job growth and reflation trade. It will further accelerate earnings, leading to increased dividend and buyback activities. Additionally, the tax repatriation will allow companies to bring offshore cash back home, paving the way for increased mergers and acquisitions. A combination of all these factors bodes well for the stock market.

Given this, we have highlighted some strategies that could prove extremely beneficial for investors in a choppy market:

Make Hot Sectors Your Friend

Technology and biotech are the top two outperformers in the current turmoil. 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 their key industries. Meanwhile, the biotech sector got a dual boost from its non-cyclical nature, which provides a defensive tilt to the portfolio in a turbulent market (read: Tech ETFs Scaling New Highs on Surging FANG Stocks).

Some of the top-ranked ETFs that are surging lately could be excellent picks. These include Invesco NASDAQ Internet ETF PNQI, iShares North American Tech ETF IGM, VanEck Vectors Biotech ETF BBH and Virtus LifeSci Biotech Clinical Trials ETF BBC. These funds have Zacks ETF Rank #1 (Strong Buy) or 2 (Buy).

Prepare for Volatility

Investors should prepare themselves for twists and turns arising from the bitter tariff talks. While there are many ways to survive the market turmoil, investing in lower volatility ETFs or low beta ETFs could reduce losses in declining markets, while generate decent returns when the markets rise.

ETFs like iShares MSCI USA Minimum Volatility Index Fund USMV, PowerShares S&P 500 Low Volatility Fund SPLV, First Trust Low Beta Income ETF FTLB and PowerShares Russell 1000 Low Beta Equal Weight Portfolio USLB could be compelling choices (read: Renewed Trade Spat Grips Market: 6 ETF Buying Zones).

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, Schwab U.S. Large-Cap Value ETF SCHV, Schwab Fundamental U.S. Large Company Index ETF FNDX, Vanguard Mega Cap Value ETF MGV and SPDR S&P 500 Value ETF SPYV have a Zacks ETF Rank #2.

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 and Barrons 400 ETF BFOR are worth a look.

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 growth products could lead to higher returns. iShares Russell 2000 Growth ETF IWO, Vanguard Small-Cap Growth ETF VBK, 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 at 52-Week High With More Room to Run).

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ISHARS-RS 2K GR (IWO): ETF Research Reports
ISHARS-SP SC GR (IJT): ETF Research Reports
PWRSH-ND INTRNT (PNQI): ETF Research Reports
SPDR-SP5 VL (SPYV): ETF Research Reports
BIOSH-BIO CLNCL (BBC): ETF Research Reports
ISHARS-NA TECH (IGM): ETF Research Reports
SCHWAB-US LCV (SCHV): ETF Research Reports
VIPERS-SC GRWTH (VBK): ETF Research Reports
VANECK-BIOTECH (BBH): ETF Research Reports
POWERSH-SP5 LVP (SPLV): ETF Research Reports
SPDR-SP6 SC GR (SLYG): ETF Research Reports
PWRSH-SP5 HQ (SPHQ): ETF Research Reports
ISHARS-MS US MV (USMV): ETF Research Reports
SCHWAB-F US LCI (FNDX): ETF Research Reports
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