Geopolitical risks from a U.S.-Iran conflict can put investors in a state of unease, and when that happens many market experts believe the best strategy to combat uncertainty is to get on the defensive. This could lead to trading options in relative value ETFs that highlight defensive sectors over cyclical sectors.
It’s not just geopolitical risks that can spur a market of uncertainty as the bull market rages on, experts are still wondering whether the end is in sight as the extended rally gets longer in the tooth. That being said, it’s best to hide out in defensive sectors like health care, industrials or consumer staples.
“We think that the market is fully valued,” said Chad Morganlander, portfolio manager at Washington Crossing Advisors. “Our long-term expectations are roughly about 5% total return on the S&P 500. Our recommendation, though, is to be overweight health-care companies, staples as well as industrials, believe it or not. We see that there’s a seam of opportunity there.”
2019 was a banner year for equities as the major indexes seemingly marched through potential barriers like the U.S.-China trade conflict en route to newer highs. However, the euphoria can’t continue and investors expecting a duplicate performance in 2020 might be brimming with too much optimism.
Morganlander added that when the indexes do experience a downturn, this presents a greenlight opportunity to floor the accelerator pedal and buy.
“For 2020, [investors]have lofty expectations for S&P earnings and revenue growth. So yes, you can get a pullback. On those pullbacks though, we would be adding to these real solid positions. Companies that are consistently grown, consistently profitable and don’t have a lot of debt on their balance sheet. That’s the critical thing here is to buy value or quality companies in 2020,” said Morganlander.
Relative Value ETF Options
Relative value ETFs present investors with the ability to buy into the notion that defensive sectors will outperform cyclical sectors and vice versa. Investors can choose which side of bullishness they wish to err on and trade their hunch.
If investors believe that U.S. defensive sectors will outperform cyclical sectors, the Direxion MSCI Defensives Over Cyclicals ETF (NYSEArca: RWDC) provides a means to not only see defensive sectors perform well, but a way to capitalize on their outperformance compared to cyclical sectors.
Conversely, for those investors looking to continued upside in U.S. cyclical sectors over defensive sectors, the Direxion MSCI Cyclicals Over Defensives ETF (NYSEArca: RWCD) offers them the ability to benefit not only from cyclical sectors potentially performing well, but from their outperformance compared to defensive sectors.
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