As investors consider the current market conditions today, many should be prepared for what is coming and how looking beyond the benchmark through customized ETF strategies may help diversify risks ahead.

In the recent webcast, 4th Quarter Market Review and Outlook, Edward Kerschner, Chief Portfolio Strategist, Columbia Threadneedle Investments, reviewed how far markets have come this year, with U.S. stocks leading equities while investment-grade and emerging markets were leading fixed income.

So far in 2019, more dovish comments from the U.S. Federal Reserve have fueled all asset classes, delivering positive returns, but concerns on trade negotiations and tariffs continue to weigh on the markets.

U.S. stock market volatility also returned to normal levels in 2019 after the spike in volatility at the end of 2018 capped off a tumultuous year. On average since 1992, the daily price swing in the Dow Jones Industrial Average was 0.72%, compared to the 0.60% so far in 2019.

Looking at some of the broader economic themes, Kerschner painted a picture of slowing global growth across the board, with emerging markets staying relatively unchanged.

“With economic growth slowing and PE valuations above normal levels, equities are being supported by low interest rates. We anticipate low returns for most liquid asset classes. Equity returns are likely to be higher than other asset classes and volatility will be slightly higher with more frequent spikes,” Kerschner said.

In this type of environment, Jay McAndrew, National Sales Manager, Strategic Beta, Columbia Threadneedle Investments, highlighted the Columbia Diversified Fixed Income Allocation ETF (NYSEArca: DIAL) that follows an alternative indexing methodology to potentially help bond investors garner improved returns and potentially diminish the negative effects of sudden swings.

“As rates return to more normal levels, investing in fixed income will require looking for sources of return beyond just interest rates,” Kerschner said.

“Fixed income investors may need to become less dependent on duration strategies and more focused on spread opportunities. With their spreads attractive and the U.S. consumer a distinct bright light, strategies like Agency MBS should be considered,” Kerschner added.

The bond ETF tries to reflect the performance of the Beta Advantage Multi-Sector Bond Index, a rules-based multi-sector strategic approach to debt market investing. The underlying smart beta index covers six sectors of the debt market. The result is an index customized for each sector, optimizing for yield, quality and liquidity with monthly rebalancing discipline to manage drift.

The Columbia Multi-Sector Municipal Income ETF (NYSEArca: MUST) is also another way for investors to broaden their opportunity set and gain exposure to a more effective tool to implement a passive muni solution. MUST could help complement a traditional approach to municipal bond investing and improve investor outcomes. The smart beta methodology leans toward potential opportunity as opposed to traditional market cap-weighting or indebtedness. As a result, the portfolio takes a more active approach to enhance yield and generate improved risk-adjusted returns over conventional municipal benchmarks while following a passive, rules-based indexing methodology.

“Munis today have (indeed always have had) a positively sloped yield curve; and revenue bonds have higher Sharpe ratios than GOs, suggesting opportunity in both duration and credit,” Kerschner said.

Additionally, the Columbia Research Enhanced Core ETF (RECS) and the Columbia Research Enhanced Value ETF (REVS) offer investors and advisors’ cost-efficient access to the firm’s quantitative investment research strength. The two strategies try to address common concerns or frustration about not being able to remove underperforming stocks from passive ETFs’ indices. Half the stocks in the Russell 1000 and Russell 1000 Value have at least one sell-side analyst rating of “hold” or “sell.”

“Traditional benchmarks include the ‘kitchen sink’ and may not provide advisors the exposure they expect or what their clients need,” McAndrew said.

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

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