This year has been a stark contrast to the steady bull market we enjoyed in 2017 as 2018 was marked by bouts of volatility, forcing ETF investors to adapt to the changing conditions.
For example, growth was one of the most popular style plays for years, helping investors capture fast paced, cyclical stocks in an extended bull run. However, with uncertainty rearing its ugly head, investors have shifted away from this riskier and overbought market segment.
Investors have alternatively sought out value and quality plays for a more defensive positioning in the late market cycle. Many have looked to value as a way to continue to capture potential U.S. stock market gains but still maintain a slightly defensive exposure in case of further troubles. For instance, among the most popular ETF plays of 2018, the Vanguard Value ETF (NYSEArca: VTV) attracted $9.7 billion in net inflows, iShares MSCI Min Vol USA ETF (Cboe: USMV) experienced $3.8 billion in inflows, Vanguard Dividend Appreciation ETF (NYSEArca: VIG) brought in $2.8 billion, iShares Edge MSCI USA Quality Factor ETF (Cboe: QUAL) added $2.8 billion and SPDR Portfolio S&P 500 Value ETF (NYSEArca: SPYV) saw $2.2 billion in inflows, according to XTF data.
While the volatility in 2018 dragged down global markets, some traders are sifting through the wreckage in hopes of finding some bargains, such as the oversold emerging markets, which have been particularly hit following the intensifying trade war between the U.S. and China. The emerging markets now look like an attractive value play, with the benchmark MSCI Emerging Markets Index trading at a 10.5 price-to-earnings, compared to the S&P 500’s 16.7 P/E.
ETF investors are also taking notice of the cheapness and growth opportunity in developing markets as the iShares Core MSCI Emerging Markets ETF (NYSEArca: IEMG) brought in $2.9 billion over the past month and $15.7 billion year-to-date.
The recent spike in volatility, with broad U.S. benchmark retreating below their long-term trend lines, has also pushed more investors into safe-haven plays to ride out the storm. Precious metals like gold have historically acted as a go-to safe store of value in times of trouble, and this time is not any different. The SPDR Gold Shares (NYSEArca: GLD) saw $1.2 billion in net inflows and iShares Gold Trust (NYSEArca: IAU) attracted $288 million in inflows so far in the fourth quarter, which stood as a stark contrast to the billions in outflows that physically backed gold ETFs experienced earlier this year in response to the strengthening U.S. dollar strengthened and rising bond yields.
Given the Federal Reserve’s tighter monetary policy outlook and interest rate normalization heading into the late economic cycle, many have also anticipated an end to the three-decade long bull run in the fixed-income market. After years of strength, the benchmark Bloomberg Barclays U.S. Aggregate Bond Index now trades with a longer duration, greater exposure to U.S. government debt and lower yield that would not safely account for the risks involved.
Alternatively, fixed-income investors may be looking into actively managed bond ETFs with an active management team that is more capable of adapting to the changing interest rates. For example, investors can supplement their portfolios with less rate sensitive strategies like the PIMCO Low Duration Active ETF (NYSEArca: LDUR). LDUR’s the management style could serve fixed income investors well as the Federal Reserve continues boosting interest rates.
Actively managed strategies are also beginning to shine and offer investors with ways to potentially enhance returns in more uncertain times. Investors may look to a time-tested active approach to potentially enhance returns. For example, the actively managed Davis Select U.S. Equity ETF (NasdaqGM: DUSA), Davis Select Financial ETF (NasdaqGM: DFNL), Davis Select International ETF (NasdaqGM: DINT) and Davis Select Worldwide ETF (NasdaqGM: DWLD) are backed by Davis Advisors’ focuses on long-term opportunities and incorporate the money manager’s judgement experience, high conviction, low turnover, accountability and alignment. The Davis team screens for fundamental characteristics, including cash flows assets and liabilities, and other criteria.
The actively managed Cambria Tail Risk ETF (BATS: TAIL) can provide income and capital appreciation from investments in the U.S. markets while protecting against downside risk. The active ETF will invest in cash and U.S. government bonds, and utilizing a put option strategy to manage the risk of a significant negative movement in the value of domestic equities, or more commonly known as tail risk, over rolling one-month periods.
Additionally, something like the ARK Invest’s flagship ARK Innovation Fund (NYSEArca: ARKK) could allow investors to tap into the growth of disruptive technologies. ARKK seeks to invest in the cornerstone companies taken from healthcare, technology and industrial sectors that focus on investing in disruptive innovation. Such companies may include ones that benefit from big data, cloud computing, cryptocurrencies, the sharing economy, genomic sequencing, molecular medicine, agricultural biology, 3D printing, energy storage, and autonomous vehicles.
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