ETF Strategies to Mitigate Risks and Enhance a Diversified Portfolio

As we are faced with ongoing volatile market conditions, investors can look to exchange traded fund strategies to protect and preserve their investment portfolios.

In the recent webcast, Protect and Preserve Client Assets and Portfolios in Volatile Markets, Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, noted that we still face elevated economic and market uncertainty as a result of the coronavirus pandemic. For example, there have been 25 days with a daily return of positive or negative 3% in 2020, compared to the five-yearly average since 1980. However, the markets have been pushing higher, with over 95% of S&P 500 company stocks now trading back above their 50-day moving average, signaling a broad rally.

Meanwhile, as more information becomes available around the world, growth estimates are turning increasingly negative. Bartolini argued that given revision trends, growth estimates are expected to be severely lower in 2020 as all regions have had more downgrades than upgrades.

As we adapt to the sudden shift in our daily lives, Bartolini also pointed out that societal trends have been upended, with consumer and corporate behavior altered, leading to an increased interest in how to stay connected. This shift has also benefited U.S. large-cap growth stocks with a heavier emphasis on technology and others that have managed to capitalize on the shift toward stay-at-home orders. The health care and technology segments have also been among the most popular plays as they attract the lion’s share of new inflows in recent months.

“Health Care and Tech have strong earnings sentiment and price momentum,” Bartolini said.

The fall in earnings and rally in stocks has distorted price-to-earnings ratios, but Bartolini argued that value opportunities are clearer, especially in foreign markets. Specifically, the MSCI Canada, MSCI Rusia, and MSCI India represent some of the most cheaply valued areas of the global market, whereas the S&P 500, notably S&P 500 Growth, are among the most overpriced.

“Value relative to growth appears cheap, with mid-caps appearing to be the cheaper option among value styles. Small cap value is not cheaper than small growth,” Bartolini said.

Looking ahead, Bartolini also argued that some areas of the market might continue to strengthen, given recent events and the shift in priorities.

“Biotech firms are likely to benefit from the need for advanced medicine, while software firms may act as the backbone of our more digitally connected society,” Bartolini said.

On the fixed-income side, as a result of the increase in a fiscal and monetary stimulus, long rates have increased, and the yield curve has slightly steepened over the past month. Consequently, a traditional 60/40 portfolio now yields the lowest amount on record as a result of the low rates and reduction in dividends, which may lead to challenges for income generation.

“1-3 Year corporates, as well as MBS, offer potential defensive yield and total return exposures that are not overextended on credit or rate risk and have Fed support,” Bartolini said.

Marc Odo, Client Portfolio Manager, Swan Global Investments, argued that investors can always remain invested, but they may also incorporate hedges to limit potential downside risks. For example, Odo highlighted the Swan DRS U.S. Large Cap Select Composite, which has produced more consistent outcomes compared to the S&P 500 Index and outperformed the benchmark in 66.9 of rolling 10-year periods.

John Forlines III, Chief Investment Officer of W.E. Donoghue, Portfolio Manager of the JAForlines Global Tactical Portfolios, highlighted rules-based investment methodologies that incorporate fundamental and technical analytics to diminish portfolio risk and volatility as a way to provide a smoother ride.

To help investors navigate these murkier waters, Bartolini highlighted three overarching themes that investors should now look toward, including a focus on innovation, pursue total returns, look for relative value opportunities.

Specifically, the SPDR Kensho New Economies Composite ETF (NYSEArca: KOMP), SPDR S&P Software & Services ETF (XSW). The SPDR S&P Biotech ETF (XBI), SPDR S&P Kensho Future Security ETF (NYSEARCA: FITE), and SPDR S&P Kensho Intelligent Structures ETF (SIMS) are some ways an investor can focus on innovative growth ideas that may continue to enhance an investment portfolio.

Bond ETFs such as the SPDR Portfolio Mortgage-Backed Bond ETF (SPMB), SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB), SPDR Portfolio High Yield Bond ETF (SPHY) and SPDR Barclays Convertible Securities ETF (NYSEArca: CWB) could help investors pursue total return through alternative fixed-income options.

Lastly, the SPDR MSCI EAFE StrategicFactors ETF (NYSEArca: QEFA), SPDR S&P China ETF (NYSEArca: GXC), SPDR S&P 400 Mid Cap Value ETF (MDYV) and SPDR Portfolio TIPS ETF (SPIP) may offer relative value opportunities as the broad markets pick up.

Financial advisors who are interested in learning more about strategies for volatile markets can register for the Thursday, June 11, webcast here.