Despite an impressive run last year, the equities market and stock exchange traded funds will still be investors’ best friend.
“We expect stocks to grind higher, if unevenly, and continue to prefer them to the alternatives,” BlackRock analysts said in a report. “While stocks are no longer cheap, they still look like a more attractive option than cash or bonds.”
The equities market can still find support from low inflation, a low interest rate environment and a gradually improving economy.
Consequently, the BlackRock strategists argue that investors should overweight equities and underweight cash and bonds. So, instead of the traditional 60/40 stock/bond split, investors may start to cut back on their bond weights and begin pushing up their stock allocations.
The world’s largest asset manager argues that investors should pare back some U.S. holdings and find better opportunities in foreign markets, specifically Europe, Japan and developing countries.
“Most U.S. investors are generally underweight international equities,” BlackRock said. “In many cases, we believe it makes sense to consider paring back some U.S. exposure in favor of non-U.S. stocks.”
For broad European market exposure, investors can take a look at the Vanguard FTSE Europe ETF (NYSEArca: VGK), SPDR EURO STOXX 50 Fund (NYSEArca: FEZ) and iShares MSCI EMU ETF (NYSEArca: EZU). [Europe ETFs Pause, but Upside Remains]
Some Japan ETFs include the iShares MSCI Japan ETF (NYSEArca: EWJ) , WisdomTree Japan Hedged Equity Fund (NYSEArca: DXJ) and db X-trackers MSCI Japan Hedged Equity Fund (NYSEArca: DBJP). [Japan ETFs Attract Value Investors]
The largest broad emerging market ETFs include the Vanguard FTSE Emerging Markets ETF (NYSEArca: VWO) and iShares MSCI Emerging Markets ETF (NYSEArca: EEM).
Moreover, investors can diversify a portfolio with alternative assets. For example, BlackRock advises incorporating alternative strategies like real estate, infrastructure or long/short approaches. For example, the Vanguard REIT ETF (NYSEArca: VNQ) provides exposure to real estate investment trusts and the Alerian MLP ETF (NYSEArca: AMLP) tracks master limited partnerships that transport oil and gas. Additionally, the ProSharse RAFI Long/Short ETF (NYSEArca: RALS) seeks to provide absolute return over a full market cycle.
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Max Chen contributed to this article.