As investors look to the markets ahead, it is important to considers ways to prepare for both cyclical and secular changes.
In the recent webcast, Barbell Cyclical and Secular Change: Balancing Opportunities and Risks, Michael Arone, Chief Investment Strategist, SPDR, State Street Global Advisors, highlighted the shift in factor trends that took place in the fourth quarter of 2020, with cyclical size and value factors taking charge.
“Size and Value rallied hard off the vaccine news, while Quality held up better than Momentum, given the potential for an uneven recovery,” Arone said.
Nevertheless, the momentum factor continues to shine in 2020 and remains the best performing single factor so far this year. This just goes to show that individual factor plays may not last forever. Investors may be better served with a diversified multi-factor ETF strategy that provides a balanced approach to diversification.
Consequently, investors may consider options like the SPDR MSCI USA StrategicFactors ETF (NYSEArca: QUS) and SPDR MSCI EAFE StrategicFactors ETF (NYSEArca: QEFA) to remain invested and limit downside risks. Rather than rebalancing to cash or allocating just to beta, these strategies can help limit the impact of volatility while pursuing returns. The ETFs track a Smart Beta index that blends low volatility, quality, and value exposures together in a single strategy.
Looking ahead, Arone believes that earnings are projected to be higher for cyclical market segments. Value and cyclicals stocks are expected to outpace growth and non-cyclicals in 2021 and 2022. He argues that given this recovery is likely to eventually feature higher rates ahead, cyclical exposure with a strong positive relationship to rates is ideal. The S&P 500 Banking Select Industry Index exhibits some of the highest 5-year correlation to the 10-year yield. Consequently, investors may consider funds like the SPDR S&P Bank ETF (NYSEArca: KBE), which tracks this banking benchmark.
The global COVID-19 crisis has also created an innovation inflection point for new technologies like robotics, genetic engineering, autonomous vehicles, and clean power, among others.
“While it is true that the long-term effects of the COVID-19 pandemic remain to be seen, there is likely to be an exponential increase in the demand for innovative technologies across many industries,” Arone said.
For innovative technology exposure, investors can look to State Street’s line of next generation ETFs, including the SPDR Kensho Clean Power ETF (CNRG), SPDR Kensho Final Frontiers ETF (ROKT), SPDR S&P Kensho Future Security ETF (NYSEARCA: FITE), SPDR S&P Kensho Intelligent Structures ETF (SIMS), SPDR S&P Kensho New Economies Composite ETF (NYSEArca: KOMP), and SPDR S&P Kensho Smart Mobility ETF (HAIL).
Investors can also consider specific sector plays to target rebounding areas of the market.
“Given strong Q4 earnings surprises, analysts have raised next-year earnings expectations for Energy, Financials, Tech, and Materials by large margins,” Arone said.
Investors can focus on sector specific exposure through ETFs like the Energy Select Sector SPDR (NYSEArca: XLE), Financial Select Sector SPDR (NYSEArca: XLF), Materials Select Sector SPDR Fund (XLB), and Technology Select Sector SPDR ETF (NYSEArca: XLK).
Richard Bernstein, CEO/CIO, Richard Bernstein Advisors, also advised investors to take a step back and consider the prevailing trends to get a clearer idea of where the opportunities lie in the current market environment.
Investors should “tailor the core by balancing between cyclical and sustainable growth” and consider what will “amplify secular change across our society,” Bernstein said. This way we can “focus on the cyclical change with a dedicated high-conviction exposure.”
Financial advisors who are interested in learning about portfolio positioning can watch the webcast here on demand.