Gone are the days when investors can simply rely on the heavy hitters that sparked the decade-long bull run, such as the FANG stocks (Facebook, Amazon, Netflix, Google) to propel them into profitability. The recently-crowned 2018 World Series-winning Boston Red Sox found their most valuable player in a 12-year journeyman and in today’s market volatility, investors can do the same–dig deep into their roster of investment opportunities with due diligence in order to find their most valuable performers.
Needless to say, October hasn’t been kind to U.S. stocks as the technology sector, in particular, has been getting trounced with the S&P 500 following the Nasdaq Composite into correction territory last week before pulling itself out in Tuesday morning’s trading session. In what could be deemed as a “Red October,” the Dow was down 6.7%, while the S&P 500 and Nasdaq were down 8.8% and 10.9, respectively, through last Friday’s trading session.
Meanwhile, at the Charles Schwab Institutional Conference in Washington, DC, ETF Trends Publisher Tom Lydon was getting a pulse on the markets through the lens of financial advisors–the same individuals who witness firsthand what investors are and aren’t clamoring for when it comes to their capital allocations. In an industry where you never want to involve emotions when making decisions, there was one common theme among the financial advisors–fear.
“They’re worried because long-term trends are down below their averages in both stocks and bonds for the first time in a long period,” said Lydon during “Countdown to the Closing Bell” on Fox Business Network on Tuesday. “They’re not getting out of the market. They’re staying in, but long-term indexes don’t all have good stocks in them, so they’re shifting to ETFs that are more quality.”
In what’s been a volatile last five days, the fear is well documented–all major indexes have been lurking below their respective 200-day moving averages.
Related: An ETF That Has America’s Values in Mind Can Also Outperform
Quality Comes to the Forefront
With the most recent sell-offs in U.S. equities, value investing could be poised for a comeback as growth and momentum might be making their way to the exits. A byproduct of a shift to value is a focus on the quality of investments–being selective and using due diligence as screeners to find the best-performing stocks.
As such, Lydon mentioned investors flocking to funds like the iShares Edge MSCI USA Quality Factor ETF (BATS: QUAL). QUAL seeks to track the investment results of the MSCI USA Sector Neutral Quality Index composed of U.S. large- and mid-capitalization stocks with quality characteristics as identified through certain fundamental metrics.
“QUAL has stocks that have earnings growth, low debt-to-equity ratios and solid stocks that have to pass mustard in order to make it to the index,” said Lydon.
Advisors Prefer Short Duration
With the short-term rate adjustments being instituted by the Federal Reserve, investors can limit exposure to long-term debt issues and focus on maturity profiles. As a result, shorter durations are in favor on the fixed-income front to prevent prolonged exposure to a bond market that’s seen its fair share of rising Treasury yields as of late.
“There’s also lower duration on the bond ETFs that advisors are going into,” said Lydon. “Long duration is frankly risky in a rising rate environment.”
Examples of bond ETFs with short duration exposure include the SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB), which seeks to provide investment results that correspond to the performance of the Bloomberg Barclays U.S. 1-3 Year Corporate Bond Index. Another option is the iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ), which tracks the investment results of the Bloomberg Barclays U.S. 1-3 Year Credit Bond Index, which includes debt that has a remaining maturity of greater than one year and less than or equal to three years.
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