Investors can breathe a sigh of relief now that October is coming to a close–a forgettable one for U.S. equities. Needless to say, October hasn’t been kind to U.S. stocks as the technology sector, in particular, has been getting trounced with the Nasdaq Composite falling by 9.2% in October, making it its second largest decline since it fell 10.8% back in November 2008.
Nonetheless, capital allocations into exchange-traded funds (ETFs) have been a constant and ETF Trends Publisher Tom Lydon joined Yahoo Finance Live on Wednesday to discuss opportunities that are abound in ETFs even in today’s volatile markets.
Top-Performing ETFs Surprise Investors
With sectors like technology getting roiled by October’s downpour of volatility, tech-centric ETFs like the Vanguard Information Technology ETF (NYSEArca: VGT) and Technology Select Sector SPDR ETF (NYSEArca: XLK) were obviously hit hard. However, on the other end of the spectrum, ETFs that have fallen on hard times in 2018 experienced a twist of fate in October, such as Brazil ETFs.
“The surprising thing is some of the unloved ETFs actually did really well,” said Lydon.
The election of the polarizing Jair Bolsonaro was the message Brazilian voters communicated to the world that anti-establishment was in and traditional politics was out. Of course, Bolsonario’s biggest task is to help extract the country from its current economic doldrums, but his election is perceived by market experts as one that leans toward the benefit of the country’s capital markets.
This bodes well for Brazil-focused ETFs like the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) and the iShares MSCI Brazil Small-Cap ETF (NasdaqGM: EWZS). Additionally, for investors looking to obtain emerging markets exposure, Brazil isn’t a bad place to start.
“Emerging markets have really been killed,” said Lydon. “Brazil is really quite an anomaly. Most emerging markets stocks and ETFs have been down for the month October. The key thing is if you’re looking for value, a lot of the emerging markets stocks and ETFs that wrap around them are in the single-digit PEs (price-to-earnings ratios)–that doesn’t happen that often.”
Skip to 26:00 to watch Lydon on Yahoo Finance:
In essence, emerging markets represent a value proposition for those investors who are willing to accept the risk in lieu of the returns in the long-term horizon.
“If you’ve got that cast iron stomach and you’re not allocated to emerging markets, you might look back a couple of years from now and say, ‘I’m glad I took advantage of that,'” Lydon added.
Related: An ETF That Has America’s Values in Mind Can Also Outperform
Bond Investments Should be Short and Active
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.
In addition, Lydon mentioned a shift to more active fund strategies as opposed to passive strategies that provide broad-based exposure to the bond markets like the iShares Core US Aggregate Bond ETF (NYSEArca: AGG).
“On the fixed income side, a lot of people are shifting over to short duration and also active strategies we haven’t seen in awhile,” said Lydon.
Examples of bond ETFs with short duration exposure include the SPDR Portfolio Short Term Corp Bd ETF (NYSEArca: SPSB) and the iShares 1-3 Year Credit Bond ETF (NASDAQ: CSJ). An ETF that implements an active strategy would be the newly-launched JPMorgan Municipal ETF (Cboe: JMUB), which taps into a municipal bond market that is rife with opportunities, but still overlooked compared to other specific areas of debt investments.
Getting Defensive in Today’s Market
At the Charles Schwab Institutional Conference in Washington, DC, 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.
“For the first time in five years, advisors are concerned,” said Lydon. “They are talking to their clients at the end of the year with their wrap-up meetings.”
So the question remains: If there is indeed concern, then how do advisors move forward with their clients’ portfolios?
“Until we see the trends turn positive again, I think people have to be defensive,” said Lydon. “Go to more factor-oriented strategies like value and quality, which ETFs can offer.”
For more market news, visit ETFTrends.com.