5 Amazing ETF Strategies for Q2

The first quarter of 2019 was great for the financial world driven by optimism surrounding the U.S.-China trade deal and the Chinese government’s stimuli to revitalize economic growth. This is especially true as the MSCI All-Country World Index, which tracks shares in 47 countries, recorded its best quarter since 2010. Wall Street also registered the best quarter of broad-based gains in a decade (read: 5 Top-Performing International ETFs of Q1).

The bullish trend continued at the start of the second quarter amid bouts of volatility. The two countries are engaged in strong negotiations to end a year-long trade war that has rattled global markets, and hopes of a deal strengthened after both sides expressed optimism last week. Additionally, the upbeat manufacturing data out of the world’s two biggest economies raised confidence in the global stock market.

The latest U.S. job numbers, which shows that the labor market rebounded strongly adding 196,000 jobs in March, helped in reassuring markets. In fact, the U.S. stock market hit its longest winning streak in a year and a half in the first week of the second quarter (read: A Spread of Top-Ranked ETFs That Crushed the Market in Q1).

However, Brexit issues, global slowdown concerns and fears of a U.S. recession continued to weigh on the global stocks. With less than 25 days away to the month of May, investors are expected to turn cautious as seasonality plays a huge role in pushing stocks down for the next six months, as per the old adage “Sell in May and Go Away.” According to this investment saying, the stock market has a long history of weak performance during the summer months (May to October).

Amid huge uncertainty, investors should have some strategies in place for the second quarter to safeguard themselves from any downside while simultaneously cashing in on opportunities that may crop up. Here are some strategies that could prove extremely beneficial for ETF investors in the coming months:

Prepare for Volatility

Investors should prepare themselves for twists and turns arising from the yet-to-materialize U.S.-China trade deal and its impact on global economic growth. While there are many ways to survive the market turmoil, investing in lower-volatility ETFs or low-beta ETFs could reduce losses in declining markets, while generating decent returns when the markets rise (read: Can Smart Beta & Factor ETFs Beat the Market?).

ETFs like iShares MSCI USA Minimum Volatility Index Fund USMV, Invesco S&P 500 Low Volatility ETF SPLV, and Invesco Russell 1000 Low Beta Equal Weight Portfolio USLB could be compelling choices. Most of these have a Zacks ETF Rank #3 (Hold).

Emphasis on Investment Styles

Investors should seek some smart stock-selection techniques and strategies to bypass risks in the market. While there are several ways to do the same, investing in smart-beta and guru ETFs could be the best way out. The smart-beta strategy helps to capture market inefficiencies in a transparent way by adding extra metrics like dividends, volatility, revenues, earnings, momentum, equal-weight and other fundamental factors to the market-cap or rules-based indices. It offers the best of both active and passive strategies, providing an opportunity to increase portfolio diversification, reduce risk and enhance returns over time with low cost.

On the other hand, guru ETFs replicate investing styles and predictions of market experts like Warren Buffett, Bill Ackman, Daniel Loeb, Cark Icahn and David Einhorn, providing a solid and well-diversified portfolio. These either try to clone stock investments of specialists or imitate their investing styles (read: How to Invest Like Warren Buffet With ETFs).

Some of the funds in these spaces, First Trust Dorsey Wright Focus 5 ETF FV, iShares Edge MSCI USA Quality Factor ETF QUAL, Invesco FTSE RAFI US 1000 Portfolio PRF, Global X Guru Index ETF GURU, and AlphaClone Alternative Alpha ETF ALFA are worth a look. PRF has a Zacks ETF Rank of 3.

Focus on Dividends

The dividend-paying securities are the major sources of consistent income for investors when returns from the equity market are at risk. This is especially true as these stocks offer the best of both these world — safety in the form of payouts and stability in the form of mature companies, which are less volatile to the large swings in stock prices. The companies that pay dividends generally act as a hedge against economic uncertainty and provide downside protection by offering outsized payouts or sizable yields on a regular basis (read: Top-Ranked Dividend ETFs Crushing the Market).

While the dividend space has been crowded, ETFs with stocks having a strong history of dividend growth seem to be good picks. Vanguard Dividend Appreciation ETF VIG and ProShares S&P 500 Aristocrats ETF NOBL have a Zacks ETF Rank #2

Bet on Small-Caps

Small-caps stocks, as represented by the Russell 2000 Index, outperformed the S&P 500 with gains of 14.2% in Q1. This is because investors are seeking shelter in these stocks that have less international exposure and generate most of their revenues from the domestic market. These pint-sized stocks are less vulnerable to trade war or any other political issue, and can better insulate investors against global headwinds.

That said, small-cap ETFs such as Schwab U.S. Small-Cap ETF SCHA, Vanguard Small-Cap Growth ETF VBK and Schwab Fundamental U.S. Small Company Index ETF FNDA could be ideal choices. All these funds carry a Zacks ETF Rank #1 (Strong Buy) or 2 (read: Small-Caps Beat S&P 500 in Q1: 5 ETF Winners).

Stay Diversified

Given the uncertainty in markets, investors should keep their portfolio well diversified with lower cost. Diversification could range between different asset classes, market caps, styles, sectors or industries, and countries with the right mix of stocks only or bonds only or a combination of stocks and bonds.  

Adding top-ranked ETFs like Vanguard Total World Stock ETF VT and iShares MSCI ACWI ETF ACWI to the portfolio could lead to optimal risk-adjusted returns for investors seeking global exposure. Schwab U.S. Broad Market ETF SCHB, also having a Zacks Rank #2,could be worth a look for a domestic play, Vanguard Total Bond Market ETF BND for a bond play and iShares Core Aggressive Allocation ETF AOA offer a combo pack (see: all the World ETFs here).

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iShares MSCI ACWI ETF (ACWI): ETF Research Reports
 
Schwab U.S. Broad Market ETF (SCHB): ETF Research Reports
 
First Trust Dorsey Wright Focus 5 ETF (FV): ETF Research Reports
 
Global X Guru Index ETF (GURU): ETF Research Reports
 
Schwab U.S. Small-Cap ETF (SCHA): ETF Research Reports
 
iShares Edge MSCI Min Vol USA ETF (USMV): ETF Research Reports
 
AlphaClone Alternative Alpha ETF (ALFA): ETF Research Reports
 
Invesco S&P 500 Low Volatility ETF (SPLV): ETF Research Reports
 
Vanguard Total Bond Market ETF (BND): ETF Research Reports
 
Vanguard Dividend Appreciation ETF (VIG): ETF Research Reports
 
Schwab Fundamental U.S. Small Company Index ETF (FNDA): ETF Research Reports
 
Vanguard Small-Cap Growth ETF (VBK): ETF Research Reports
 
ProShares S&P 500 Dividend Aristocrats ETF (NOBL): ETF Research Reports
 
Vanguard Total World Stock ETF (VT): ETF Research Reports
 
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