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Follow Goldman Sachs' Strategy with These ETFs

Zacks Equity Research

While the investing world is busy celebrating gains in U.S. equities with the key U.S. indices hitting all-time highs in the last one-month period, Goldman Sachs along with many other analysts do not expect the ascent to last long (read: After Goldman, DB Warns About S&P 500: Play Alternative ETFs).

Goldman Sachs has been forecasting a weak market for this year since November. Most recently, Goldman Sachs lowered the outlook on equities to 'underweight' for three months and has a ‘neutral’ outlook for a one-year frame. Goldman’s latest 2016 target is 2,100, down about 3.7% from the current level (read: Goldman Raises Yellow Flag on 2016: ETFs to Buy).

Overvaluation is plaguing both equities and fixed-income this year. Both are rallying in a jittery market. Global macroeconomic doldrums especially in Europe, overall global growth issues, election in the U.S. and last but not the least sudden geopolitical shocks have given a boost to safe asset U.S. Treasuries, but may spoil the sport for stocks.

On the other hand, some solid U.S. economic readings, signs of a slowly abating earnings recession, reduced worries in the oil patch and relatively better banking earnings despite low levels of yields and improving tech earnings favored risk-on sentiments recently and stocks soared.

However, investors should note that the recent ascent in the market was not at all free of fear as trading volume remains a little weak and low volatility ETFs marched ahead even in the bull market (read: Low Volatility ETFs in Vogue Despite a Bull Market).

What’s Goldman’s Take Now?

Goldman is now expecting the yield on the benchmark 10-year U.S. Treasury to rise from about 1.5% to 2% this year on the Fed hike speculation. In such a scenario, Goldman Sachs Chief U.S. Equity Strategist David Kostin laid out some winning investing techniques. These are:

Focus on Dividend Growth

Goldman likes “companies where there is above-average dividend yields and the dividend is expected to be quite robust over the next couple years." This is especially useful if there are chances of a Fed rate hike.

One can play this trend by investing in PowerShares High Yield Equity Dividend Achievers Portfolio PEY. The fund qualifies both factors – dividend growth and higher annual yield of about 3.16% (read: 7 Dividend ETF Winners of 1H16 Worth a Watch in 2H).

Other dividend growers like SPDR S&P Dividend ETF SDY with 2.35% yield, WisdomTree U.S. Dividend Growth ETF DGRW with 2.18% yield and First Trust NASDAQ Technology Dividend ETF TDIV with 2.67% yield can also be followed if turbulence hits the market (read: Technology Dividend ETFs for Growth & Income).

Options for low volatility, high dividend ETFs, namely PowerShares S&P 500 High Dividend Low Volatility Portfolio ETF SPHD with 3.26% yield and FlexShares Quality Dividend Defensive Index Fund QDEF with 2.79% yield also are there.

Focus on Revenue Growth

“Companies that have posted revenue growth of 10 percent or more, but are trading below 7.5 times enterprise value to sales” are on Goldman’s wish list. In this segment, Goldman especially highlighted companies like Alphabet, Amazon.com and PayPal.

Now, first, this idea can be played by ETFs heavy on those afore-mentioned stocks.

For Alphabet, there is PowerShares NASDAQ Internet Portfolio ETF PNQI.

For Amazon, there are VanEck Vectors Retail ETF RTH and Consumer Discretionary Select Sector SPDR Fund XLY.

For PayPal, there is Guggenheim Spin-Off ETFCSD).

The other option is to play with revenue-weighted ETFs like RevenueShares Large Cap Fund RWL and Oppenheimer Ultra Dividend Revenue ETFRDIV. These ETFs pick constituents on the basis of revenue earned by companies instead of market cap (read: Oppenheimer to Add Revenue-Weighted Feature to ESG ETFs).

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VANECK-RETAIL (RTH): ETF Research Reports
SPDR-CONS DISCR (XLY): ETF Research Reports
WISTR-US QD (DGRW): ETF Research Reports
PWRSH-HY EQ DV (PEY): ETF Research Reports
PWRSH-ND INTRNT (PNQI): ETF Research Reports
OPP-UDIV FD (RDIV): ETF Research Reports
SPDR-SP DIV ETF (SDY): ETF Research Reports
PWRSH-SP5 HI DV (SPHD): ETF Research Reports
FT-NDQ TECH DIF (TDIV): ETF Research Reports
FLEXS-Q DIV DEF (QDEF): ETF Research Reports
OPP-LC REV (RWL): ETF Research Reports
GUGG-SPIN-OFF (CSD): ETF Research Reports
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Zacks Investment Research
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