Winning ETF Strategies For Q2

by: Zacks Funds

After the upheaval in the first quarter, the broader market is still far from even close to a bear market. The S&P 500 may be just 0.9% up from the year-to-date look (as of April 12, 2016), but the decline in the key U.S. index is merely 4% from the previous high. This points to a far better situation than a 10% decline from the previous high which defines a correction or a 20% fall from the previous high that makes it a bear market.

However, this does not ensure a smooth road ahead. With the broader market blowing hot and cold every now and then, downside risks prevail in the ongoing second quarter. Agreed, factors driving the market now - especially oil price stabilization and the drop in dollar - are somewhat favorable, but the near-term outlook of the broader market may turn glum given the expected downbeat earnings for Q1.

After all, there are always panicky investors in the market, who may just start dumping stocks following the underperformance in Q1 earnings. And if it turns out to be a herd investing pattern, it could ruin market returns despite a healing earnings trend from the second quarter itself.

So, what should we do? Since it is difficult to predict whether the market will move up or go down from this point in Q2, it is better to shield yourself from all volatility. Thus, for investors, we shall detail the possible asset class movements in Q2 and the likely ETF bets.

Dividend Exposure

As far as global market investing is concerned, it's better to stay diversified. However, since negative rates are prevailing in many developed economies, the drive for dividend will be higher. So, investors can tap products like the First Trust Dow Jones Global Select Dividend Index ETF (NYSEARCA:FGD), which yields about 5.16% annually or the iShares Core MSCI Total International Stock ETF (NYSEARCA:IXUS) that offers about 2.85% in annual dividend yield.

The case is similar back home. Thanks to the delay in further Fed rate hike, long-term yields are hovering at lower levels, making dividend ETFs popular at present. The WisdomTree High Dividend ETF (NYSEARCA:DHS) and the iShares Core High Dividend ETF (NYSEARCA:HDV) could be best suited for this play.

Focus on Quality or Value in the U.S.

Cautious investors may also hunt for dividends in high-quality value stocks rather than running after high-yielding products. In this vein, investors can buy the Vanguard Dividend Appreciation ETF (NYSEARCA:VIG) which considers those companies that have a record of increasing dividends over time or the PowerShares S&P 500 High Quality Portfolio ETF (NYSEARCA:SPHQ) that provides exposure to the constituents of the S&P 500 index with long-term growth and stability of a company's earnings and dividends. Yet another choice for this category is the PowerShares Dynamic Large Cap Value Portfolio ETF (NYSEARCA:PWV).

Which Capitalization to Bet in the U.S.?

The U.S. economy is making strides with improving trends seen in the manufacturing, housing and labor markets. But the dollar is sagging on a dovish Fed. This makes a winning combination for mid-cap ETFs as this spectrum bears the traits of both large and small caps. It has moderate international exposure which will remain unharmed in a weaker dollar environment. However, a value quotient is desirable even in this area. Thus, we pick two mid-cap value ETFs for investors, namely the Guggenheim S&P MidCap 400 Pure Value ETF (NYSEARCA:RFV) and the PowerShares Fundamental Pure Mid Value Portfolio ETF (NYSEARCA:PXMV). Both carry a Zacks Rank #1 (Strong Buy).

Where Will Bond Markets Go?

Bond ETFs had a stupendous run in Q1 and are likely to be loved by investors this quarter too. However, investors can tap investment-grade corporate bond ETFs this time around rather than sticking to the safe Treasury bond ETFs. The SPDR Barclays Long Term Corporate Bond ETF (NYSEARCA:LWC) yielding about 4.05% annually can be considered for this purpose.

Should You Toss Out Currency Hedging from International Investing?

Since the Fed vowed to take it easy with the policy tightening stance and hinted at just two rate hikes this year, the U.S. dollar is likely to be muted in the rest of Q2. So, currency-hedged ETF investing may not be a very popular concept this quarter.

If global turmoil persists, the safe-haven currency Japanese yen is likely to be stronger and thus currency-hedging technique will not be that fruitful. Investors can thus take a look at the Buy-rated iShares MSCI Japan Minimum Volatility ETF (NYSEARCA:JPMV) and the SPDR MSCI Japan Quality Mix ETF (NYSEARCA:QJPN). These funds will help you navigate market volatility. The IQ 50 Percent Hedged FTSE Japan ETF (NYSEARCA:HFXJ) with a Zacks Rank #3 (Hold) is another option to deal with the currency translation risk.

As far as the European market is concerned, investors can ride on massive policy easing by investing in the WisdomTree Europe SmallCap Dividend ETF (NYSEARCA:DFE).

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