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Winning ETF Strategies for Q4

Sweta Killa

The recent global market turmoil has not spared any corner of the equity investment world, raising questions over the sustainability of the six-year bull-run. In fact, almost all the sectors have been trending down over the past couple of months, pushing the indices in the red territory from the year-to-date look as well.

This is especially true in the backdrop of the persistent slowdown in China, sluggishness in emerging markets and other developed economies, slump in commodities, and the plunge in oil prices. The Fed’s dovish comments in its latest FOMC meeting added to the global worries and heightened uncertainty. As volatility is likely to dominate for the reminder of the year, the returns from the stocks remain at risk (read: 3 Hit and Flop Zones of Q3 and Their ETFs).

However, the bullish sentiment for U.S. stocks remains intact given the substantial improvement in the economy and a healing job market. The delay in increase in interest rates will drive the U.S. stocks higher as the near-zero rates have allowed the domestic stock market to complete a spectacular six-year bull-run.

In this backdrop, investors should have some strategies in place for the coming months in order to safeguard themselves from the downside while simultaneously cashing in on opportunities that arise over time. Here are some strategies that could prove extremely beneficial for ETF investors in the last quarter of this year:

Emphasis on Investment Styles

Given the nasty web of global worries, investors should seek some smart stock-selection techniques and strategies to bypass the 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, revenue, earnings, momentum, equal weight and other fundamental factors to the market cap or rules-based indices. It offers 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 Smart Beta ETFs to Beat the Choppy Market).

On the other hand, guru ETFs replicate the investing styles and predictions of market gurus 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 the gurus or imitate their investing styles.

Some of the funds in these spaces, First Trust Dorsey Wright Focus 5 ETF (FV), MSCI USA Quality Factor ETF (QUAL), PowerShares FTSE RAFI US 1000 Portfolio (PRF), iShares MSCI USA Minimum Volatility Index Fund (USMV), Global X Top Guru Holdings Index ETF (GURU), AlphaClone Alternative Alpha ETF (ALFA) and Direxion iBillionaire Index ETF (IBLN), are worth a look.

Make Trending Sectors Your Friend

A few sectors are expected to beat the broader market in the final quarter of 2015 buoyed by the earnings growth expectation. Among them, transportation is the only sector with double-digit earnings growth for Q3, excluding auto, which has been hit hard by the Volkswagen Scandal.

Despite the fact that a strong dollar is eating away most of the revenues of big transporters, the sector remains the biggest beneficiary of cheaper oil prices and an improving U.S. economy. Both the iShares Dow Jones Transportation Average Fund (IYT) and SPDR S&P Transportation ETF (XTN) have been greatly benefitted. The duo has a Zacks ETF Rank of 3 or ‘Hold’ rating.

Construction also has a solid growth rate of 8.5%, as per the Zacks Earnings Trend. This is especially true, as the sector remained relatively unscathed by global growth worries, suggesting on-track recovery in the coming months. The stocks and ETFs in this space will continue to surge in Q4. In fact, all the three ETFs - SPDR S&P Homebuilders ETF (XHB), iShares U.S. Home Construction ETF (ITB) and PowerShares Dynamic Building & Construction Fund (PKB) - have seen Zacks Ranks surging by one notch to 2 or ‘Buy’ rating in the latest ratings update (read: Two Homebuilder ETFs & Stocks Set to Soar).

Hedge Your Portfolio

Investors should apply some hedging techniques to their equity portfolio that could prove beneficial amid market turbulence. In fact, these funds have the potential to stand out and might outperform the simple vanilla funds in case of rising volatility. The most popular are PowerShares S&P 500 Downside Hedged Portfolio (PHDG) and Barclays ETN+ S&P VEQTOR ETN (VQT).


PHDG is an actively managed fund that seeks to deliver positive returns in rising or falling markets that are uncorrelated to the broad equity or fixed-income market returns. It provides broad equity market exposure with an implied volatility hedge with dynamic allocation in different asset classes: equity, volatility and cash (read: 4 Ways to Hedge Volatility with ETFs).

On the other hand, VQT uses volatility futures contracts directly to hedge the turmoil. It increases allocation to the equity component as measured by the S&P 500 Total return index, in times of low volatility while increases volatility exposure as measured by the S&P 500 VIX Futures Total Return index and allocates entirely into cash if the index slumps 2% or more in the preceding 5 days. In this manner, the note manages to keep a check on volatility.

Bet on Mid-Caps

Investors seeking to participate in the growing economy but are worried about uncertainty, should consider mid-cap stocks in the basket form. While the large companies are normally known for stability and the smaller ones for growth, mid caps offer the best of both worlds, allowing growth and stability simultaneously in a portfolios (read: 3 Mid Cap Growth ETFs to Buy for Q4).

The middle-of-road securities are arguably safer options and have the potential to move higher, especially if political issues or financial instability creeps into the picture. This situation is largely expected given the fears over the global growth slowdown and deflation. Further, while the federal government has averted a shutdown for now with a temporary bill, the fear lingers until  mid-December, especially if the government fails to cut the two-year deal within the 10 weeks of additional time.

That said, mid cap ETFs such as Vanguard Mid-Cap ETF (VO), iShares Russell Mid-Cap ETF (IWR), iShares Russell Mid-Cap Growth ETF (IWP), iShares S&P Mid-Cap 400 Growth ETF (IJK) and Vanguard Mid-Cap Growth ETF (VOT) could be ideal choices. VO and IWR have a Zacks ETF Rank of 2 while the other three sport a Zacks ETF Rank of 1 or ‘Strong Buy’ rating.


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FT-DORSEY WFFF (FV): ETF Research Reports
ISHARS-MS US QF (QUAL): ETF Research Reports
GLBL-X GURU IDX (GURU): ETF Research Reports
ISHARS-MS US MV (USMV): ETF Research Reports
ISHARS-TRAN AVG (IYT): ETF Research Reports
SPDR-SP HOMEBLD (XHB): ETF Research Reports
PWRSH-SP5 DHP (PHDG): ETF Research Reports
BARCLY-SP VEQTR (VQT): ETF Research Reports
VIPERS-MID CAP (VO): ETF Research Reports
ISHARS-RS MC (IWR): ETF Research Reports
VANGD-MC GROWTH (VOT): ETF Research Reports
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