Many are looking at stock exchange traded funds in the year ahead to adapt to changing market conditions, but investors should still pick their spots.
ETF Trends publisher Tom Lydon spoke with Ed Lopez, Head of ETF Product Management and Marketing at VanEck, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk about what financial advisors and investors should be looking out for in 2017.
“Right now for 2017, we’re really thinking about a change in investment dynamics – rising interest rates, change in policies with the new administration” Lopez said. “We’re talking to advisors about a rotation to equities.”
Lopez argued that policy changes, such as lower corporate taxes, deregulation and fiscal spending, are all good for the riskier equities market.
“Longer term, I think that the case for equities is there,” Lopez said. “Short-term, I think, maybe, valuations might be a little stretched, so you have to pick your spot.”
However, investors should still keep in mind that stocks never act as expected and may experience bouts of short-term volatility.
“What it really comes down to is identifying qualities companies and buying them at the right price,” Lopez said.
As a way to gain exposure to quality companies, investors may look at the VaneEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT), which implements Morningstar’s economic moat rating to identify strong companies with wide economic moats.
In a year where many are looking toward more active styles to pick out areas of opportunities, MOAT may offer investors exposure to smart management.
“It’s technically an index-based ETF and some might call it smart beta, but it’s really just smart investing and it does essentially what I just said – it finds good companies and buys them at good prices,” Lopez said.
The underlying Morningstar Moat Focus Indices target companies with a wide economic moat or sustainable competitive advantages and targets the most undervalued moat stocks, which have helped generate significant excess returns relative to the overall market.
According to Morningstar’s indexing methodology, there are five sources of economic moats: Intangible assets that include brand recognition to charge premium prices. Switching costs that make it too expensive to stop using a company’s products. Network effect that occurs when the value of a company’s service increases as more use the service. A cost advantage helps companies undercut competitors on pricing while earning similar margins. Lastly, efficient scale associated with a competitive advantage in a niche market.