Global stocks have been in a mess in October, stymied by rising rate worries in the United States, uncertainty before the mid-term election, possible U.S. sanctions on Saudi Arabia, spiraling Chinese economic slowdown, trade war tensions, political tensions in Europe and the resultant shockwaves across the world.
The Fed kept the hawkish tone intact, spurring fears of a gradual cease in cheap money inflows. Emerging markets have been miserable due to the dollar strength. The S&P 500 and the Dow Jones are in the red for the year now and the Nasdaq slipped into correction territory.
Big three U.S. ETFs, namely SPDR S&P 500 ETF SPY, SPDR Dow Jones Industrial Average ETF DIA and Invesco QQQ Trust QQQ have lost about 9.1%, 7.9% and 11.2% this month (as of Oct 24, 2018). All-world ETF iShares MSCI ACWI ETF ACWI has shed about 9.5% this month.
Now the question is if the selloff is overdone or more pressure is waiting ahead. Morgan Stanley apprehends more selling pressure on Wall Street due to falling liquidity and growing “concerns about peaking growth”. The research house sees some more pressure in high-flying areas like growth, technology and consumer discretionary. Against this backdrop, the investing world may be at a loss of ideas on where to park money for smart gains.
Sectors to Hit & Flop
Morgan Stanley estimates that forward P/E ratios for technology and consumer discretionary will fall by 6% to 8% and see their valuations coming down to the tune of the S&P 500 as a whole. Though all analysts do not believe so as Goldman Sachs believes that “computer and software makers are cheaper than they’ve been historically” and tech stocks should recover soon, investors may want to consider some safer tech ETFs now (read: Why to Cash in on the Slump & Grab Tech ETFs).
Given this, investors can bet on inverse tech ETFs like ProShares UltraShort Technology REW. Once the markets rebound, safer tech ETFs like Invesco S&P 500 Equal Weight Technology ETF RYT and First Trust NASDAQ Technology Dividend Index Fund TDIV can be played. And since the fourth-quarter includes the holiday season, First Trust Nasdaq Retail ETF (FTXD) may not get a bashing.
On the other hand, high-yielding sectors and highly leveraged sectors will falter in a rising rate environment. So, Utilities Select Sector SPDR ETF XLU could be at risk. Having said this, we would like to note that the sector is likely to fare better as long as there are selloffs in the market and investors fly to safety.
Drive for Dividends
If the market remains edgy, it is better to seek safety under the shelter of dividend aristocrats like Schwab US Dividend Equity ETF SCHD. Investors can also bank on high-dividend ETFs like Global X SuperDividend U.S. ETF DIV (that yields 6.24% annually) as high-dividend payouts will make up for some capital losses if there is any (read: 5 Dividend ETFs Worth Buying Now).
Occasional Volatility to Crack the Whip
Investors can deal with rising volatility in various ways. First comes low-volatility ETFs like SPDR S&P Low Volatility ETF SPLV and iShares Edge MSCI Minimum Volatility USA ETF USMV, second are defensive ETFs like AGFiQ US Market Neutral Anti-Beta BTAL and AdvisorShares Ranger Equity Bear ETF HDGE, and last but not the least in queue are volatility ETFs themselves such as iPath S&P 500 VIX Short-Term Futures ETN VXX. Notably, as the name suggests, volatility products are quite rowdy in nature and thus suit investors with a short-term notion.
Where Will Bond Markets Go?
Investors should note that yield curve may flatten ahead. Since global political tensions are rife, long-term bond yields are expected to rise at a slower pace while short-term bond yields are likely to jump with a hawkish Fed.
Apart from this, investors can also take a look at interest rate-hedged high yield bond ETFs. High Yield Interest Rate Hedged ETF HYHG is one such option, yielding more than 5.88% annually. WisdomTree Negative Duration U.S. Aggregate Bond Fund AGND is yet another lucrative option to stave off rising rate risks (read: 4 ETF Picks for October).
Investors can also eye investment-grade corporate bond ETFs like iShares iBoxx $ Investment Grade Corp Bond ETF LQD, which yields 3.51% annually.
Want to Go Global?
It’s better to stay diversified as far as global market investing is concerned as there are very few corners that are in the green right now. Still, rates are low in several developed economies. So, investors can definitely try out some rate-sensitive sectors like infrastructure — iShares Global Infrastructure ETF IGF. The fund yields 3.16% annually. Investors should note that the fund lost much lesser than the S&P 500 in this volatile October.
SPDR-DJ IND AVG (DIA): ETF Research Reports
IPATH-SP5 VX ST (VXX): ETF Research Reports
ISHARS-IBX IG (LQD): ETF Research Reports
POWERSH-SP5 LVP (SPLV): ETF Research Reports
SPDR-UTIL SELS (XLU): ETF Research Reports
ISHARS-GL IN (IGF): ETF Research Reports
GUGG-SP5 EW TEC (RYT): ETF Research Reports
ISHRS-MSCI ACWI (ACWI): ETF Research Reports
ACTIVE-BEAR (HDGE): ETF Research Reports
WISDMTR-B USABN (AGND): ETF Research Reports
GLBL-X SPRDV US (DIV): ETF Research Reports
ISHARS-MS US MV (USMV): ETF Research Reports
QS-US MN AN-BET (BTAL): ETF Research Reports
FT-NDQ TECH DIF (TDIV): ETF Research Reports