Despite the recent correction in the equities , markets and exchange traded funds have more room to rise, with improving growth and loose monetary policies to fuel the economy.
“Although it’s still entirely possible to have a bear market despite a decent economy, given solid growth and a timid Fed, we don’t believe the current correction marks the end of the bull market,” writes Russ Koesterich, managing director and BlackRock‘s global chief investment strategist.
In the U.S., Koesterich pointed to potential “pockets of value,” such as mega-capitalization stocks and high-yield bonds, that look more attractive after the selling pressure.
For instance, the Dow Jones Industrials were trading at slightly above 13 times forward earnings.
“While many of these companies are facing pressure from a stronger dollar and sluggish global growth, current prices appear to discount those risks,” Koesterich said. “Plus, as we have discussed in the past, high-quality companies, rather than stocks that are driven by market momentum, are likely to offer some insulation given our expectation for more equity market volatility.”
The SDPR Dow Jones Industrial Average ETF (NYSEArca: DIA), which tracks the Dow Jones Industrial Average of 30 blue-chip stocks, shows a 16.5 price-to-earnings, according to Morningstar data. DIA includes 87.8% mega-caps and 12.2% large-caps.
The Guggenheim Russell Top 50 Mega Cap ETF (NYSEArca: XLG) singles out the biggest U.S. company stocks taken from the the Russell 1000 large-cap index. Additionally, ETF investors can choose from other options, including the Vanguard Mega Cap ETF (NYSEArca: MGC), which may include more large-cap exposure; iShares S&P 100 ETF (NYSEArca: OEF), which follows 100 of the largest stocks with a liquid options market.
Meanwhile, high-yield bonds were recently showing the largest premium over Treasuries in three years.
“Given our view that the U.S. economy should continue to post moderate growth and any increase in interest rates will be modest, we believe this asset class offers a combination of attractive yields and tamer volatility relative to equities,” Koesterich added.
The iShares iBoxx $ High Yield Corporate Bond ETF (NYSEArca: HYG) has a 6.65% 30-day SEC yield, SPDR Barclays High Yield Bond ETF (NYSEArca: JNK) has a 6.56% 30-day SEC yield, PowerShares Fundamental High Yield Corporate Bond ETF (NYSEArca: PHB) has a 4.92% 30-day SEC yield and AdvisorShares Peritus High Yield ETF (NYSEArca: HYLD) has a 10.53% 30-day SEC yield. [Why High Yield Still Has a Role to Play]
Alternatively, investors may consider higher quality fallen angel junk bonds that have a greater tilt toward the upper end of the speculative-grade spectrum. For instance, the Market Vectors Fallen Angel High Yield Bond ETF (NYSEArca: ANGL) tracks so-called fallen angel, speculative-grade debt and is one of the few junk bond ETFs with a positive performance so far this year. ANGL has a 5.63% 30-day SEC yield. [Fallen Angel Bond ETF for Higher Quality Junk Debt Exposure]
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Max Chen contributed to this article.