As second-quarter earnings move forward, investors may be wondering where to allocate their capital through the second half of 2019. According to the July edition of Direxion Investments’ Relative Weight Outlook, investors may want to focus on U.S. equities and value-oriented strategies.
A recent Morningstar report for U.S. mutual fund and exchange-traded fund (ETF) fund flows during the month of June show trends that could be favoring U.S. equity funds in the long-term. With a number of market analysts and economists ready to sound the alarms on a global economic slowdown, this could mean continued strength for U.S. equities over international equities.
In particular, passive equity funds within the U.S. saw a large number of inflows compared to their active fund counterparts. This influx into passive U.S. equity funds differed from the move out of international equity funds–passive and active funds alike.
“We remain confident that asset allocations that lean towards U.S. exposures (relative to International) and Growth (relative to Value) will reward investors on a relative basis,” wrote Direxion Invesments. “And while we remain aware of shorter-term developments in the macro and micro storylines, we continue to watch the trend lines, not the headlines.”
Looking ahead, the capital markets are hoping that a rate cut by the Federal Reserve could give U.S. equities another shot in the arm before the close of 2019. Will this continue to translate into more strength for U.S. equities over international equities?
U.S. Versus International ETFs and Vice Versa
For investors looking for continued upside in U.S. equities over international equities, the Direxion FTSE Russell US Over International ETF (NYSEArca: RWUI) offers them the ability to benefit not only from domestic U.S. markets potentially performing well, but from their outperformance compared to international markets.
For the opposite side of the trade, the Direxion FTSE International Over US ETF (NYSEArca: RWIU) gives investors the opportunity to capitalize on their hunch that international equities will outdo U.S. equities
RWIU seeks investment results, before fees and expenses, that track the FTSE All-World ex US/Russell 1000 150/50 Net Spread Index. The FTSE All-World ex US/Russell 1000® 150/50 Net Spread Index (R1AWXUNC) measures the performance of a portfolio that has 150 percent long exposure to the FTSE All-World ex US Index and 50 percent short exposure to the Russell 1000® Index.
On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150 percent and the weight of the Short Component is equal to 50 percent of the Index value. In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express an international over domestic investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.
Growth Versus Value and Vice Versa
Buying stocks on the cheap relative to their value and then holding them for an extended duration has been the impetus for value investing. With investing icons like Warren Buffett popularizing the strategy, it’s difficult to not consider value investing as part of one’s portfolio, but with the bull market still in its extended phase and investors basking in the sunlight of growth, are they ready to completely bury value?
One way investors can achieve this is by concentrating on the value factor. During the volatile moments of the market, investors were quick to react to trade war news. It’s the type of noise that muddies the minds of investors and disconnects them from the fundamentals of an asset and thus, it’s value.
Last year, the growth factor had its day in the sun as the extended bull market hit its peak. Now, investors are realizing the downside of also owning these growth-oriented equities.
That isn’t to say, however, that value stocks are completely immune to fluctuations in the market. Just like during the market doldrums to end 2018, investors are typically better off discarding the growth factor and seeking refuge under an umbrella of value as a defensive play.
For investors looking to capitalize on continued emphasis on growth, they can play the Direxion Russell 1000 Growth Over Value ETF (NYSEArca: RWGV). If they feel value could resurrect itself, they could also use the Direxion Russell 1000 Value Over Growth ETF (NYSEArca: RWVG).
However, speaking to the point of growth exercising its strength over value, RWGV measures the performance of a portfolio that has 150% long exposure to the Russell 1000® Value Index (the “Long Component”) and 50% short exposure to the Russell 1000® Growth Index (the “Short Component”). On a monthly basis, the Index will rebalance such that the weight of the Long Component is equal to 150% and the weight of the Short Component is equal to 50% of the Index value.
In tracking the Index, the Fund seeks to provide a vehicle for investors looking to efficiently express a value over growth investment view by overweighting exposure to the Long Component and shorting exposure to the Short Component.
Trade wars is just one facet that could affect value over growth or vice versa. With a U.S.-China trade deal already priced into the markets, the next trigger event investors can look to is rate cuts by the Federal Reserve.
For more market trends, visit ETF Trends.