Stock exchange traded fund investors should not be dissuaded by the lackluster start to the year as the sudden spike in volatility may pass and markets begin to reflect further economic growth.
According to Goldman Sachs Group (NYSE: GS) derivatives strategists led by Krag “Buzz” Gregory, the CBOE Volatility Index, or so-called VIX, will average 16 in 2015, or about 3 points below its 19.3 reading late Wednesday, reports Callie Bost for Bloomberg.
The analysts argue that with the market in the middle of a business cycle, equities may experience diminished volatility and reflect stable U.S. growth of more than 2.5% this year.
“Low volatility is the norm, not an anomaly at this stage of the business cycle,” Goldman analysts said. “If the economy does remain robust as our economists expect, the gravitational pull for volatility is down, not up, at this stage of the business cycle.”
If the markets turn more complacent, traders can capitalize on the calmer conditions with inverse VIX offerings, such as the VelocityShares Daily Inverse VIX Short-Term ETN (NYSEArca: XIV) and ProShares Short VIX Short-Term Futures ETF (NYSEArca: SVXY).
Alternatively, investors who have a strong conviction in the continued equities market rally can target the faster moving growth and momentum stocks – growth stocks are comprised of companies that are expected to grow earnings at an above-average rate. For instance, the Powershares QQQ (NasdaqGM: QQQ), which tracks the NASDAQ-100, provides a broad growth play for investors, with a 58.0% tilt toward tech companies and 18.1% position in consumer discretionary names.
Investors can also target growth-specific index ETFs, like the iShares Russell 1000 Growth ETF (NYSEArca: IWF), iShares S&P 500 Growth ETF (NYSEArca: IVW) and Vanguard Growth ETF (NYSEArca: VUG). IWF takes growth picks from the large-cap universe of Russell 1000 stocks. IVW highlights growth names from the S&P 500. VUG selects picks from the largest 85th percentile of the U.S. stocks. All three ETFs overweight tech and discretionary names as well.
Additionally, momentum ETFs, such as the First Trust Dorsey Wright Focus 5 ETF (NasdaqGM: FV) and iShares MSCI USA Momentum Factor ETF (NYSEArca: MTUM), are also options to consider. FV is based on a Dorsey, Wright & Associates index that focuses on price momentum and relative strength rankings. MTUM also selects stocks that exhibit higher price momentum.
For more information on market volatility, visit our volatility category.
Max Chen contributed to this article.