After years of sitting back and enjoying the ramp up in growth, investors are now getting a taste of the increased volatility that usually occurs towards the end of a bullish cycle. As many reevaluate their investment portfolios, one may consider quality exchange traded fund strategies to help smooth out the ride ahead.
Looking at the slope of the yield curve, Bank of America Merrill Lynch argued that volatility could double in 2019 and believed that many investors, notably the millennials demographic, are unequipped to handle the sudden change up, CNBC reports.
“The most memorable early event of their careers was likely the Financial Crisis,” Equity and Quant Strategist Savita Subramanian said in the note. “Growth and momentum stocks have outperformed for their entire careers, whereas value investing has been a losing proposition.”
The CBOE Volatility Index, or so-called VIX, a gauge known as Wall Street’s “fear index,” has averaged around 17 since for this age group, or 25% lower than the prior two decades’ average of 22. During the more complacent market conditions in recent years, many investors have focused on high-flying growth stocks like those found in the technology segment, but we will need to adapt to the changing conditions ahead.
“The prototypical professional investor is likely focused on growth and momentum, thinks Financials are uninvestible, is unused to volatility, and sees valuation as largely irrelevant,” Subramanian said. “But momentum is now expensive, crowded and at risk, Financials are transformed and valuation always matters, eventually.”
Consequently, Subramanian argued that investors should focus on “high quality companies”.
As more analysts are calling for a shift to quality or companies with healthy balance sheets and strong cash flow, ETF investors can also focus on this segment of the markets for a more defensive portfolio tilt.