This article was originally published on ETFTrends.com.
With Christmas upon us, it's a time to reflect on a year of what was and for the savvy investor, to reassess his or her portfolio to strategize for a prosperous 2019.
The growth-fueled investments that were able to feed into a prosperous bull run in 2018 can no longer be repurposed for 2019, particularly after a tornado of volatility the last few months. The numbers are readily apparent in all the major indexes--the Dow Jones Industrial Average down 9.20 percent, the S&P 500 down 9.61 percent and the Nasdaq Composite down 8.26 percent.
However, investors that weren't able to ride the height of the historic bull run wave can start anew. Here are five exchange-traded funds (ETFs) to look at that can capitalize on burgeoning trends in the investment space as investors turn the page on 2018 and begin the new year.
Whether we like or not and whether we want it or not, disruptive technology in the form of robotics, artificial intelligence (AI), machine learning, or any other type of disruptive technology is the next wave of innovation that will permeate all sectors in some form or fashion. To take advantage of this transformative movement, investors can look to ARKK.
“AI should be able to help us construct portfolios in an even more intelligent way and identify potential risk clusters that could be harmful, which may be now hidden to us," said Hywel George, director of investments at the Old Mutual Investment Group.
ARKK’s focus is primarily on domestic and foreign equity securities of companies that coincide with the ETF’s investment theme of disruptive innovation–a technology or strategy that disrupts the status quo and develops its own niche market. ARKK invests in both developed and emerging markets with the intent to use American Depositary Receipts (ADRs)–securities offered in the U.S., but are offered as a specified number of shares in a foreign corporation.
On the topic of innovation, fixed-income products will see a forthcoming revolution in terms of ETF offerings that corner specific areas of the bond market, particularly as this asset class gains more capital allocations as a result of growing global growth concerns. With bond market mavens warning investors of headwinds in the fixed income space like the possibility of inverted yield curve, rising rates and BBB debt sliding out of investment-grade, investors need to be keen on where to look for opportunities.
One area is within the municipal bond space, which may have gotten a boost following November's midterm elections. In particular, with respect to infrastructure spending—it’s one of the few things, if any, that Democrats and Republicans can agree on, but with the newly-divided Congress, this could fuel municipal bond ETFs.
HYD seeks to replicate the performance of the Bloomberg Barclays Municipal Custom High Yield Composite Index. Like SHYD, HYD normally invests in securities that comprise the benchmark index, which is comprised of publicly traded municipal bonds that cover the U.S. dollar denominated high yield long-term tax-exempt bond market.
As alluded to earlier, according to IndexIQ's latest insights for 2019, they cited fixed income as a space that's rife for innovation. Especially with the new ETF Rule looming, it will "lower some of the barriers to entry for new issuers and new products. While much of the “white space” in the equity ETF realm has already been filled, fixed income remains an area ripe for innovation and some provisions of the rule, such as more allowances for the use of “custom baskets” could open the door for new types of fixed income ETF approaches to brought to market which would not have been feasible under the old approach."
For the fixed-income investor, investors can look at actively-managed funds like JPST, which can serve as a flexible tool during times when rates are decreasing or rising--a topic of contention as of late with volatility roiling the capital markets. The floating rate component of bonds in JPST’s debt portfolio would effectively hedge against interest rate risk and capitalize on any short-term rate adjustments the Fed decides to make through in 2019.
Furthermore, the fund seeks to maintain a duration of one year or less, thereby limiting prolonged exposure to the fluxes of the capital markets and reducing volatility. This is effective for investors who want to avert the risk associated with holding on to debt securities with a longer duration.
“We are seeing a lot of interest in our short-term fixed-income product and it’s coming from two dimensions,” said Yasmin Dahya, Head of Americas Beta Specialists at JP Morgan Asset Management. “From on dimension, it’s clients who, because of low interest rate, are looking to come up the yield curve to add additional yield to their portfolio, but there’s also clients who are thinking about rising rates and their implications on their portfolio, are looking to come down the yield curve and lower their duration.”
The capital markets are aptly called as such–the focus being on capital–but capital can manifest itself in other forms aside from money, including social responsibility. Rather than focusing on market value, social responsibility retrains investors' minds to focus on just values–things that matter the most to investors rather than profitability and with this rise in social consciousness comes a rise in capital market innovation in the form of socially responsible ETFs.
Although the idea of socially responsible ETFs is not relatively new, it’s still struggling to break into the mainstream. However, all is not lost according to Schwab’s ETF Investor Study that revealed while 13 percent of the ETF investors were oblivious to the idea of SRI/ESG investing, the majority were aware of the concept–41 percent.
Despite this, only 14 percent have actual investments in SRI/ESG incorporated into their portfolios. Another 17 percent of the study have in-depth knowledge of SRI/ESG investing, but no tangible investments in the area.
One way to steer more investors to ESG products is through education.
“Data-driven educational material and more hands-on training will ultimately be what’s required,” said Brendan Powers, senior analyst at research and analytics firm Cerulli. “This effort will necessitate cooperation from asset managers supplying the product and their distribution partners (e.g., broker/dealer home offices, registered investment advisor custodians) that have built out the platforms for advisors to access the strategies.”
ESGV seeks to track the performance of the FTSE US All Cap Choice Index, which is market-capitalization weighted, and is composed of large-, mid-, and small-cap stocks of companies located in the United States. The companies are screened for certain ESG criteria by the index sponsor, which is independent of Vanguard.
With rate hikes taking a toll on emerging markets ETFs, a more dovish Federal Reserve could help the EM space shake out of their 2018 doldrums. After hiking rates for a fourth time in 2018 last week, Fed Chair Jerome Powell said that 2019 could see less rate hikes--a welcome sign for emerging markets that have been hit by rising rates stoking the fire for a stronger dollar.
The U.S. stock market has been the default play for investors during the historic, decade-long bull run, but the latest volatility may have steered them off course and opportunities abroad could be an alternative. Despite the deep declines in emerging markets this year, with respect to value compared to price, many of these ETFs from abroad present a profitable opportunity that can be realized, especially if China and the U.S. ameliorate their trade differences.
ETF investors can look to funds like IEMG, which seeks to track the investment results of the MSCI Emerging Markets Investable Market Index. The index is designed to measure large-, mid- and small-cap equity market performance in global emerging markets.
From an investment perspective, the case for emerging markets ETFs like IEMG lies in the prospect for a dead cat bounce.
“The theory is dead simple: emerging-market assets have already bombed, so the downside, if things get worse, is much lower and if things recover they have greater potential to perform,” said Anthony Peters, an independent analysts. For more market trends, visit ETF Trends.
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