As we consider the market trends, investors should anticipate what to look out for in 2020 and look for ways to construct a diversified portfolio with low-cost exchange traded fund strategies to gain efficient broad market exposure.
In the recent webcast, Low-Cost ETFs: Strategies for Efficient Broad Market Exposure, Vito Sciaraffia, Chief Investment Officer, Innealta Capital; Mike Dickson, Head of Portfolio Management, Horizon Investments; and Robert Forsyth III, Head of SPDR Americas Client Enablement Group, State Street Global Advisors, touched upon prevailing market trends and potential risks to look out for in 2020, offering ways for investors to construct a portfolio with low-cost strategies as a way to craft a well diversified portfolio to meet the challenges ahead.
The strategists pointed out that the global stocks’ double-digit gains following 2018’s -11% return reflected the largest positive year-over-year return differential since 2009. Even as the U.S. equity markets continue to ride the rally and reach all-time highs, investors will have to contend with an uncertain environment, low growth, benign inflation and low rates.
However, that does not mean we are anticipating a bearish turn anytime soon. Global governments and central banks remain firmly committed to keeping the party going, with interest rates still hovering around record lows and accommodative measures supporting further growth.
Consequently, the strategists argued that a U.S. recession is unlikely, but they warned that data still indicates an economic slowdown. A slowdown extends beyond the US, as global economic sentiment remains weak and data around the world continues to miss estimates. Meanwhile, 2020 earnings estimates may be too optimistic and will likely be revised lower.
“In 2020 the margin for error — and for opportunity — will be as small as it’s ever been given this backdrop, and investors will need thread to the needle of these risks,” Forsyth said.
“As investors enter the new decade, we think it’s prudent to position investment portfolios with these three themes in mind: Stay invested, but limit downside risks. Actively balance risk in the hunt for yield. Position to temper the impact of macro volatility,” he added.
Investors should keep in mind that no matter the growth concerns, U.S. broad-based valuations are elevated relative to history, so the fundamental safety net has a few holes in it. As the markets continue to push higher but risks mount, many remain apprehensive of missing out on a further rally. In 85% of periods, returns on U.S. equities remained positive six months after hitting all-time highs.
Consequently, investors may consider options like the SPDR S&P Dividend ETF (NYSEArca: SDY), SPDR MSCI USA StrategicFactors ETF (NYSEArca: QUS), SPDR MSCI EAFE StrategicFactors ETF (NYSEArca: QEFA) and SPDR SSGA US Large Cap Low Volatility ETF (LGLV) to remain invested and limit downside risks. Rather than rebalancing to cash or allocating just to beta, these strategies ranging the volatility spectrum can help limit the impact of volatility while pursuing returns.
Income-minded investors can also seek income through diversification as balancing the sources of risk may be the most beneficial strategy in 2020 for the portion of the portfolio that is mean to provide income, stability and diversification.
As a means to actively balance risk and still generate attractive yields, investors can consider actively managed ETFs that leverage active management in the core, income and liquidity sleeves of a portfolio, including the SPDR DoubleLine Total Return Tactical ETF (NYSEArca: TOTL), SPDR SSgA Income Allocation ETF (NYSEArca: INKM) and SPDR SSgA Ultra Short Term Bond ETF (NYSEArca: ULST).
Being active can also take many forms, and with the advent of specific fixed-income sector ETFs, anyone has the ability to tailor core Aggregate bond-based portfolios for the year ahead. Targeted bond ETFs include options like the SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB), SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN), SPDR Portfolio Mortgage Backed Bond ETF (NYSEArca: SPMB) and SPDR Bloomberg Barclays Emerging Markets Local Bond ETF (NYSEArca: EBND).
Lastly, the SPDR Gold Shares (NYSEArca: GLD) and SPDR Gold MiniShares Trust (NYSEArca: GLDM) could allow investors to temper the negative impact of macro volatility. In 2020, gold may provide a robust and multi-faceted source of diversification, evidenced by its historical correlations and performance during prior risk events.
“At Horizon we view risk as loss for clients nearing retirement and in peak earning years. Therefore, without significant market losses, these strategies may help clients have increased equity exposure for longer,” Dickson said.
Financial advisors who are interested in learning more about low-cost ETF strategies can watch the webcast here on demand.