Rating ETFs & Staying Diversified

February 05, 2019

ETF.com: What pockets do you particularly like?

Bartels: Where we see leadership is in technology and health care. We think if you get a China deal, the sector that's best positioned to benefit from it will be industrials. For income, with yields now coming back down and the Fed becoming a little bit more dovish, we think utilities would be a place you can go back to.

ETF.com: What about the international landscape? Are you buyers there too?

Bartels: We’re in the camp of being more selective. We acknowledge emerging markets are the most attractive because valuation is there. But we haven't moved to an overweight. Europe and Japan would not be our top pick. We would be United States, emerging markets and tied between Europe and Japan.

Remember that we have Brexit. Some of our macro analysts in Europe are concerned about the economy in Europe slowing down. We do have a slight pickup in Japan.

ETF.com: Is this a good time to be more tactical with all that’s going on globally?

Bartels: If you take a longer-term view, you don't have to go tactical. Tactical is for traders, whereas strategic positioning is for clients, particularly in wealth management.

And when it comes to a wealth management client, it's about the asset allocation. That explains the returns over the longer term. Make sure you have an asset allocation that meets not only your goals, but your risk tolerance.

And what we learned with the baby bear market is diversification—that’s what cushions a portfolio. We tend to forget about that when markets go up, because the portfolio's going up, so we don't question it.

When we start seeing volatility, we encourage our clients to really look at their asset allocation and their risk profile, and to rebalance if they're not positioned where they should be. Rebalancing means you take some profits from something that’s done well, like equities, and go back to your asset allocation weighting. Not enough clients look to rebalance, because it's working, so they don't want to touch it. You have to do some tactical rebalancing from time to time.

But I always encourage clients that, as long as you're not a trader, don't pay attention to the day-to-day noise of the markets, because it increases the likelihood you're going to make a mistake in your portfolio.

ETF.com: Is diversification harder to come by today due to higher correlations between equity and fixed income? Do you have to get creative?

Bartels: I don't buy into that at all. Yes, correlations have gone up, so you could see stocks and bonds being down. But bonds are down less than stocks, so you're still diversified. Diversification can involve a negative number. It’s not ideal, and I think when people think of diversification, they think of positive returns. It's not always about a positive return. It's about having a different return. It's the difference in the type of volatility in the returns.

Cash was a great diversifier, and cash has done nothing in portfolios for a long time. But now, cash actually has a return; it's an asset again, it's not giving you zero. But cash was always an asset in the sense that, if markets went down, it didn't go down. People underestimate the power of cash. You don't have to go into exotic volatility products to get diversification.

Contact Cinthia Murphy at [email protected]

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