The economy and markets are still on a bullish path but the road may be bumpy in the near-term. Consequently, ETF investors will have to take a more targeted approach to navigate the path ahead.
“We see the overall environment as positive for risk assets, but expect more muted returns and higher volatility than in 2017,” according to BlackRock.
The U.S. tax reforms and increased public spending plans will fuel further economic growth and earnings estimates, but the current environment is also plagued with added uncertainty to the economic outlook. Specifically, the ongoing trade war talks and a spike in real yields can cause markets to stumble.
“We like equities. U.S. earnings revisions have rocketed higher to factor in the boon from lower corporate taxes — and earnings momentum is rising across the world. We favor U.S. and emerging market (EM) equities but we see choppier markets and less-heady returns than last year ahead,” BlackRock added.
Given the backdrop of heightened volatility but ongoing bullishness in the equities market, ETF investors may consider low-volatility strategies to diminish downside risk and still maintain upside potential. For example, the iShares MSCI USA Minimum Volatility ETF (NYSEArca: USMV) and the iShares MSCI Emerging Markets Minimum Volatility ETF (Cboe: EEMV) select stocks based on variances and correlations, along with other risk factors.
The low or minimum volatility strategy targets stocks that have lower expected risk or less idiosyncratic risks. Specifically, the strategy targets equities that exhibit lower beta, a measure of volatility or systematic risk of a security to that of the overall market. Consequently, minimum volatility portfolios are constructed with stocks that exhibit lower market risk or beta.