This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today's article is by John Davi, chief executive officer and chief investment officer of Astoria Portfolio Advisors in New York City.
It's a new year—the perfect time to look ahead and think about asset allocation. There are plenty of 2019 market outlooks out there, but a lot of them don’t provide actionable investment ideas. We offer here 10 investment strategy ideas for 2019.
Value has emerged across the global equity space. Investors' disdain for equities is quite high. That usually means it’s the time to buy.
Astoria is turning constructive on equities after being skeptical in 2018. We are a buyer of stocks at these valuation levels. To that end, we prefer systematic, rules-based and multifactor ETF strategies.
Quality & Low-Volatility Factors
Specifically, we like U.S. companies with above average return on equity and return on assets, i.e., high-quality stocks. We also like the minimum-volatility factor. We believe the global economy is slowing, and both of these factors—quality and low vol—have historically done well during an economic slowdown.
On the international front, we like value, quality and low-volatility strategies that are dynamically currency hedged. There is a greater margin of safety in international equities in the current environment. In particular, we like emerging markets, which, per consensus, have the highest earnings growth rate in 2019 and among the lowest P/E ratios.
Short Duration In Fixed Income
In fixed income, we prefer ultra-short duration and higher-quality bonds for now. We are concerned about the supply/demand imbalance for bonds in 2019. We are using cash, which we have argued that, on a per unit of risk basis, is quite attractive with a flat U.S. yield curve.
When the world was swimming in an ocean of liquidity, buy and hold was the right strategy. We no longer believe that strategy will work as the Federal Reserve normalizes its balance sheet, global economies decouple and policy risk remains elevated. Our key message here is, don’t be afraid to be tactical and dynamic in 2019.
And of course, Astoria will be including alternatives to soften our portfolio volatility; that is, after all, Astoria’s “True North.”
To implement these market views, here are 10 investment strategies for 2019:
- The WisdomTree US Quality Dividend Growth Fund (DGRW) combines stocks with above-average earnings growth and above-average quality. Historically, the highest-quality companies have outperformed all other quintiles over time.
- The WisdomTree U.S. Multifactor Fund (USMF) combines value, quality, low correlation and momentum in a systematic rules-based format. As of Dec. 28, 2018, USMF had a P/E ratio of 12.35.
- The JPMorgan Ultra-Short Income ETF (JPST). With the U.S. yield curve relatively flat, we believe that owning the front end is an attractive risk reward. As of Dec. 31, 2018, the 30-day SEC yield for JPST was 2.95%.
- The IQ Merger Arbitrage ETF (MNA) replicates a merger arbitrage strategy in a systematic, rules-based format. This strategy has historically had low correlations to stocks.
- The iShares Edge MSCI Min Vol U.S.A. ETF (USMV) systematically allocates to stocks that in aggregate have lower volatility than the broader market. Given the slowdown in the global economy, we believe more defensive-oriented stocks are attractive to own in an asset allocation portfolio.
- The WisdomTree Emerging Markets Multifactor Fund (EMMF). In our view, emerging market equities are offering investors a unique opportunity to purchase an asset that’s vastly discounted but has strong earnings growth. EMMF had a P/E ratio of 9.8 as of Dec. 26, 2018.
- The Xtrackers Municipal Infrastructure Revenue Bond ETF (RVNU) comprises bonds issued by state and local municipalities where the interest and principal repayments are generated from dedicated revenue streams. As of Sept. 30, 79% of the ETF had bonds that were rated AA or A. The average final maturity is 24.50 years, while the modified duration-to-worst is 6.33.
- The Direxion Auspice Broad Commodity Strategy ETF (COM). Commodities are valuable in multi-asset portfolios because they have low correlations to traditional asset classes and have historically provided a hedge against inflation. However, in our view, commodities should be tactically traded. COM has the ability to go to cash if volatility picks up. Last year, COM outperformed some of its buy-and-hold competitors (PDBC, COMB and DBC by 11-12%).
- The iShares Gold Trust (IAU). Gold has proven to be a good portfolio diversifier against policy uncertainty, exogenous shocks and elevated stock market volatility. In Q4 2018, gold was up 7.5%, while the S&P 500 Index was down 13.5%. With deteriorating dollar fundamentals, we favor holding gold in our multi-asset portfolios.
- The WisdomTree Floating Rate Treasury Fund (USFR). Floating-rate Treasury securities are an effective way for investors to reduce their exposure to rising interest rates while generating income. As of Jan. 7, 2019, USFR had a 30-day yield of 2.3%.
For Astoria's complete outlook, please click here.
You can reach John Davi at [email protected] or @AstoriaAdvisors. ETF holdings shown are for illustrative purposes only and are subject to change at any time. For full disclosure, please refer to our website: www.astoriaadvisors.com/disclaimer.