4 Smart ETF Strategies for the End of the Year | ETF Trends

As exchange traded fund investors look to the rest of the year ahead, many are considering factor-based or alternative indexing methodologies for smarter investment strategies.

In the recent webcast, Q4 Market Outlook: Where to Find Smarter Investment Strategies, Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, pointed out that U.S. equities have led on year-to-date performance across regions, with U.S. large-cap category taking the lead.

John Davi, Founder and Chief Investment Officer, Astoria Portfolio Advisors, also noted that the current market environment is characterized by contained credit spreads, strong consumer confidence and a strengthening housing market.

However, that does not mean there are no risks. Bartolini underscored a persistent weakness in manufacturing activity globally, despite strong consumer demand that has supported economic sentiment improvement in the U.S. Consequently, analysts have slashed earnings growth estimates throughout the year amid the global economic slowdown.

Meanwhile, the outperformance in U.S. equities, notably U.S. large-caps, now exhibit forward price-to-earnings valuations that are at their highest level since January 2018, while valuations of overseas assets, like Chinese equities, have become more attractive in comparison

While the economy continues to push forward and markets maintain their momentum, Bartolini argued that investors should stay invested but focus on quality.

“During economic slowdowns, U.S. equities historically generated strong returns. Quality outperformed by the most, on average,” Bartolini said.

For example, looking back to 1990s, the quality factor has exhibited an average cumulative return of 33% during an economic slowdown, compared to 29% for minimum volatility, 21% for value, 14% for size and 26% for the broader market. This trend does not seem any different this time around.

“Late-cycle performance trends have started emerging in 2019, as Low Vol and Quality outperformed,” Bartolini said.

Stepping back, Rusty Vanneman, President/Chief Investment Officer, CLS Investments, also pointed out that the quality factor has worked in global markets and not just U.S. markets.

Additionally, Bartolini highlighted dividend growers as another way to diversify in this late cycle since dividend growers tend to outperform dividend yielders in a slowdown environment.

Investors can look to strategies that focus on quality or companies that exhibit strong fundamentals over growth such as the SPDR S&P Dividend ETF (NYSEArca: SDY) and SPDR MSCI USA StrategicFactors ETF (NYSEArca: QUS).

SDY covers companies that have consistently increased dividends for at least 20 consecutive years, potentially providing exposure to value oriented high-quality companies to generate income while mitigating downside risk.

QUS is a low-volatility strategy that focus on firms with healthy balance sheets that trade at inexpensive valuations to enhance core U.S. exposures with reduced risks and sufficient upside potential.

Fixed-income investors may also find opportunities to diversify in the current market environment. Real yields are currently not only negative but also below their most recent moving averages, with the yield curve flattening toward inversions in August, Bartolini said. Those who are seeking higher yields may notice that as growth has decelerated, credit quality has deteriorated, with downgrades outpacing upgrades. Meanwhile, short and intermediate investment-grade bonds had more attractive yield per duration profiles with smaller drawdowns than broader investment-grade or high-yield exposures.

Investors can also consider alternative fixed-income plays by looking to targeted strategies, including bond ETFs like the SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB) and SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL).

SPIB can help investors gain exposure to higher yield with a still attractive yield-per-unit-of-duration profile. The one to 10 year space may be a better option than broad corporate or other intermediate five to 10 year exposures.

TOTL is an actively managed core bond fund that includes traditional and non-traditional sectors to provide maximized total return.

Financial advisors who are interested in learning more about market strategies for the quarter ahead can watch the webcast here on demand.