Markets may be hitting highs sporadically, but uncertainty prevails. No, earnings-related worries in the peak of the reporting cycle are not making investors jittery; it's President Trump who is hitting headlines with his controversial plans and policies. His protectionist policies regarding his trade, immigration and deregulation in the banking sector are occasionally spurring skepticism.
The global economy is improving and one of the main spoilers for the last two years - oil price - is striving to attain stabilization since the OPEC output cut deal. The U.S. economy appears to be the star in the developed nations' pack.
In such a scenario, what should be your best bet on the decent rally in U.S. stocks while insulating your portfolio from political and economic uncertainty? In our opinion, large value ETFs can go a long way to protect investors' wealth right now. We'll tell you why.
Why Large Cap?
Large caps have wider foreign exposure. For long, this segment has been out of investors' favor due to the rising greenback. But the U.S. dollar has been soft lately due to weaker wage growth in the otherwise sound job report.
In any case, the greenback saw the worst of a year in three decades. It saw heavy losses in late January as Trump spoke about the currency war. He indicated that several European and German economies kept their currencies low to gain trade advantage.
Moreover, thanks to lukewarm wage growth, the Fed is expected to walk on a gradual policy tightening mode. As per a poll of primary dealers - 23 banks that are into direct business with the Fed - hinted at no hike until the second quarter and two hikes this year, though the Fed guided for three initially. Experts don't see a rate hike from the Fed in its next meeting in March.
If the Fed remains slow and Trump favors a low-dollar environment, the greenback is likely to stay tame in the coming days. This fact has widened the scope of outperformance for those companies that operate aggressively in foreign lands. And investors should note that though not completely abated, global growth worries are not as awful as they used to be few quarters back.
Next comes earnings improvement. Large-cap stocks, the S&P 500, finally ended the long-rut of earnings recession. Earnings growth of the S&P 500 is expected to remain on track to reach its highest level in two years, as per Earnings Trends issued on February 1, 2017. For the Q4 earnings season, the S&P 500 is expected to score 6% earnings growth on 3.9% revenue growth.
Given the Trump-induced volatility, mainly pertaining to foreign relationships, picking value securities in this capitalization level allows investors to earn more returns. Since political issues will likely keep the broader market on the edge, staying on the value spectrum seems wiser for now.
Notably, value ETFs remain investors' hot favorites. "Three of the top four smart-beta ETFs for new assets in 2016 were value funds," as per FactSet with Vanguard Value ETF (NYSEARCA:VTV) hauling in about $5.4 billion in new assets.
We have found a number of large-cap value ETFs, each of which is a Buy and expected to outperform in the near term.
First Trust Large Cap Val AlphaDEX ETF (NASDAQ:FTA)
The fund looks to track The NASDAQ AlphaDEX Large Cap Value Index, which is an enhanced index and employs the AlphaDEX stock selection methodology to select stocks from the NASDAQ US 500 Large Cap Value Index. It has a Zacks ETF Rank #1 (Strong Buy).
PowerShares Russell Top 200 Pure Value ETF (NYSEARCA:PXLV)
The fund looks to track the Russell Top 200 Pure Value Index. The index focuses on strong value characteristics selected from the Russell Top 200 Index. The fund has a Zacks ETF Rank #2 (Buy).
Guggenheim S&P 500 Pure Value ETF (NYSEARCA:RPV)
The underlying index of the fund - the S&P 500 Pure Value Index - focuses on the S&P 500 companies with strong value characteristics. The fund has a Zacks ETF Rank #2.