How Can ETF Investors Prepare for the Market Ahead? | ETF Trends

Exchange traded fund investors can consider the opportunities that come from the near-term impact of the U.S. election on the markets while the global recovery process continues.

“Within equities we hold large tilts in favor of developed markets outside the US and emerging markets, driven by more favorable cyclical conditions, attractive local asset valuations and an expensive US dollar. The confluence of these medium and short-term drivers increases the potential for long-term capital inflows in non-US equity markets. As a result, we hold a large underweight position in US equities, especially in quality and momentum stocks, given our tilts in favor of value and (small) size factors, which we believe should eventually benefit from higher operating leverage and a recovery in the global earnings cycle,” Alessio de Longis, a Senior Portfolio Manager for the Invesco Investment Solutions team at Invesco, said in a research note.

Investors can also play Invesco’s optimistic view through targeted ETF plays. For example, the Invesco Strategic US Small Company ETF (NasdaqGM: IUSS) is designed to measure the performance of high quality, small-sized US companies. The eligible equity securities are assigned a business-size score based on the equally-weighted average of sales, operating cash flow, total return of capital and book value over the prior five years or life of the security. The securities are then assigned a quality score based on the equally-weighted average of efficiency (ratio of sales-to-assets in the prior year) and growth (percentage change in ratio of sales-to-assets over the prior five years or life of the security). Finally, each eligible security is ranked in descending order by its Business-Size score.

IUSS YTD Performance

Additionally, the Invesco S&P Smallcap 600 Pure Value ETF (NYSEArca: RZV) focuses on exhibit strong value characteristics in the S&P SmallCap 600 Index. Value is measured by the following risk factors: book value-to-price ratio, earnings-to-price ratio and sales-to-price ratio.

For more international market exposure, investors can look to funds like the Invesco FTSE RAFI Developed Markets ex-U.S. Portfolio (NYSEArca: PXF) and the Invesco FTSE RAFI Emerging Markets ETF (PXH).

PXF is based on the FTSE RAFI Developed ex U.S. 1000 Index. The Fund will generally invest at least 90% of its total assets in securities that comprise the Index as well as American depositary receipts and global depositary receipts that represent securities in the Index. The Index is designed to track the performance of the largest developed market equities (excluding the US), selected based on the following four fundamental measures of firm size: book value, cash flow, sales and dividends.

PXH seeks to track the investment results of the FTSE RAFIT Emerging Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index, as well as ADRs and GDRs that represent securities in the underlying index, which is designed to track the performance of securities of companies domiciled in emerging market countries with the highest ranking cumulative score (“Fundamental Value”), selected from the constituents of the FTSE Emerging All Cap Index, as determined by the index provider.

Given the current outlook of a Joe Biden presidency and a split U.S. Congress, investors may want to reposition accordingly.

“In this scenario, we believe equity markets outside the US, particularly emerging markets can benefit from lower trade policy uncertainty and a more diplomatic engagement by the White House on trade disputes with other countries. However, a split Congress should translate into largely unchanged fiscal policy on matters such as healthcare, infrastructure spending, minimum wage and tax reform. Historically, policy impasse has often translated into a ‘no news is good news’ narrative, which tended to favor risk assets and dampened markets volatility. However, this scenario would probably preserve the status quo in terms of relative sector performance, potentially minimizing one catalyst for the growth-to-value rotation. We believe this scenario may have a moderately positive impact on our model portfolio,” de Longis added.

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