Five Winning ETF Strategies For Q4

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The U.S. stock market wrapped up its worst first nine months of a calendar year since 2002, with the three major indices in a bear market. The Dow Jones Industrial Average is down 21% while the S&P 500 is off 25%. The tech-heavy Nasdaq Composite has underperformed, tumbling 32%.

Persistently high inflation and an economic downturn caused by an aggressive Fed rate hike made investors jittery throughout the first nine months. Russia’s invasion of Ukraine added to the chaos.

The Federal Reserve has been on an aggressive tightening policy to fight skyrocketing inflation, which is near its highest levels since the early 1980s. In its fight, Fed Chair Jerome Powell raised interest rates by 75 bps for the fourth consecutive time, which pushed the benchmark rate to 3.0-3.25%, the highest level since 2008. The rapid tightening has sparked worries of a recession, leading to a sell-off in the stock markets.

Additionally, bouts of weak economic data across the globe added to the global slowdown fears. U.S. mortgage rates topped 6.5% for the first time since mid-2008, signaling that the hot housing market is cooling rapidly. U.S. manufacturing activity grew at its slowest pace in almost two and a half years in September, according to the Institute for Supply Management. Meanwhile, economic activity in China, the world's second-largest economy, has been declining and the property sector is also suffering. Eurozone inflation for August also rose to another record high.

However, the start of the fourth quarter has been promising with the major indices in green in the initial days of trading.

Given the current market environment, we have highlighted some investing strategies that could prove to be extremely beneficial for investors:

Bet on Rate Friendly Sectors

A rising rate environment is highly beneficial for cyclical sectors like financials, industrials, and consumer discretionary. Investors seeking protection against rising rates could load up stocks in these sectors. Some of the ETFs having concentrated exposure to the particular sector are Financial Select Sector SPDR Fund (XLF - Free Report), iShares U.S. Industrials ETF (IYJ - Free Report), and Invesco S&P SmallCap Consumer Discretionary ETF (PSCD - Free Report). All these funds have a Zacks ETF Rank #1 (Strong Buy) or 2 (Buy), suggesting their outperformance in the coming months.

Add Value to Your Portfolio

Amid myriad woes, value investing seems appealing to investors. This is because value stocks, which have strong fundamentals — earnings, dividends, book value, and cash flow — and trade below their intrinsic value, will likely benefit from growth in the economy and simultaneously from bouts of stock market volatility.

Value stocks seek to capitalize on the inefficiencies in the market and have the potential to deliver higher returns with lower volatility compared with their growth and blend counterparts. These are less susceptible to the trending markets and their dividend payouts offer safety in times of market turbulence. While most of the funds in the value space seem excellent choices, Vanguard Value ETF (VTV - Free Report), iShares Russell 1000 Value ETF (IWD - Free Report), and iShares S&P 500 Value ETF (IVE - Free Report) have a Zacks ETF Rank #1.

Bet on Quality

Quality stocks are rich in value characteristics with a healthy balance sheet, high return on capital, low volatility, elevated margins and a track of stable or rising sales and earnings growth. These products thus reduce volatility when compared to plain vanilla funds and hold up rather well during market swings. Further, academic research shows that high-quality companies consistently deliver superior risk-adjusted returns than the broader market over the long term.

Among the most popular are iShares Edge MSCI USA Quality Factor ETF (QUAL - Free Report), Invesco S&P 500 Quality ETF (SPHQ - Free Report), and Barron's 400 ETF (BFOR - Free Report).

Focus on Low Volatility

Low-volatility ETFs have the potential to outpace the broader market in an uncertain environment providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio. Further, these allocate more to defensive sectors with a higher distribution yield than the broader markets. ETFs like iShares Edge MSCI Min Vol USA ETF (USMV - Free Report) and Invesco S&P 500 Low Volatility ETF (SPLV - Free Report) could be compelling choices. These have a Zacks ETF Rank #3 (Hold).

Emphasis on Dividends

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 worlds — safety in the form of payouts and stability in the form of mature companies that 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.

In particular, ETFs with stocks having a strong history of dividend growth seem to be good picks. Vanguard Dividend Appreciation ETF (VIG - Free Report) and iShares Core Dividend Growth ETF DGRO have a Zacks ETF Rank #1.

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Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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