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Winning ETF Strategies for 2019

Sweta Killa

The year 2018 was fraught with uncertainty marked by record highs and sharp reversals. Unfortunately, the trend is likely to continue this year too. This is especially true as weak data out of Asia and Europe at the start of the year deepened worries of a global economic slowdown.

Notably, China’s factory activity contracted for the first time in 19 months in December, while Euro zone manufacturing activity dropped for the fifth month. The news led to sell-off across Asian economies (read: China's Manufacturing Activity Contracts: ETFs in Focus).

Slowing growth in emerging and developed markets as well as worries over the trade spat between the United States and China continued to weigh on the global stock market this year. Further, partial government shutdown entered the third week with lack of progress in passing a spending bill, where Trump demanded funding for $5.6 billion for a border wall being opposed by the Democrats.

However, a better-than-expected jobs report for December and Powell comment that the Fed would be flexible about future monetary policy move and it is in no hurry to raise interest rates, renewed optimism into riskier assets. The dual tailwind has led to a strong rally in the stock market pushing year-to-date returns into red. The resumption of trade talks between the United States and China also helped to push stocks higher.

With a strengthening economy buoyed by an impressive labor market, higher wages, increasing consumer spending and rising consumer confidence, stock market fundamentals look better this year. Notably, the American economy is on track this year to expand at the fastest pace in 13 years (read: Best ETF Strategies for Your Retirement Portfolio).

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

Prepare for Volatility

Investors should prepare themselves for twists and turns arising from the U.S.-China trade talks and its impact on global economic growth. 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, Invesco S&P 500 Low Volatility ETF SPLV, First Trust Low Beta Income ETF FTLB and Invesco Russell 1000 Low Beta Equal Weight Portfolio USLB could be compelling choices. Most of these have a Zacks ETF Rank #3.

Emphasis on Investment Styles

Investors should seek some smart stock-selection techniques and strategies to bypass risks in the market. While there are several ways to do the same, investing in smart-beta and guru ETFs could be the best way out. The smart-beta strategy helps to capture market inefficiencies in a transparent way by adding extra metrics like dividends, volatility, revenues, earnings, momentum, equal-weight and other fundamental factors to the market-cap or rules-based indices. It offers the best of both active and passive strategies, providing an opportunity to increase portfolio diversification, reduce risk and enhance returns over time with low cost (read: 5 Top Smart-Beta ETF Charts of 2018).

On the other hand, guru ETFs replicate investing styles and predictions of market experts like Warren Buffett, Bill Ackman, Daniel Loeb, Cark Icahn and David Einhorn, providing a solid and well-diversified portfolio. These either try to clone stock investments of specialists or imitate their investing styles.

Some of the funds in these spaces, First Trust Dorsey Wright Focus 5 ETF FV, iShares Edge MSCI USA Quality Factor ETF QUAL, Invesco FTSE RAFI US 1000 Portfolio PRF, Global X Guru Index ETF GURU, and AlphaClone Alternative Alpha ETF ALFA are worth a look. PRF has a Zacks ETF Rank of 3.

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. Among these, the most popular are iShares Russell 1000 Value ETF IWD, Vanguard Value ETF VTV and iShares S&P 500 Value ETF IVE. These funds have a Zacks ETF Rank #1 (Strong Buy) (read: Is 2019 a Year for Value ETFs?).

Bet on U.S. Mid-Caps

While large companies are normally known for stability and the smaller ones for growth, mid-caps offer the best of both the worlds, allowing growth and stability in portfolios simultaneously. Additionally, these middle-of-road securities have relatively less exposure to international markets compared to large caps and less volatile compare to small caps, thereby making them good bets in the current market turmoil. Thus, these stocks are currently a safer option and have higher upside potential.

While the space is crowded with a number of top-ranked ETFs, honing in on growth products could lead to higher returns. iShares Russell Mid-Cap Growth ETF IWP, iShares S&P Mid-Cap 400 Growth ETF IJK, Vanguard Mid-Cap Growth ETF VOT and SPDR S&P 400 Mid Cap Growth ETF MDYG are the most popular options and have a Zacks ETF Rank #1 or 2 (Buy).

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