As the year comes to a close and we prepare to embark on the roaring 2020s, it’s a good time to evaluate your asset allocation.
This time of year, advisors everywhere are busy looking closely at what’s worked, what needs to go, and where opportunity lies ahead when it comes to portfolios.
We asked some ETF strategists and advisors to offer one ETF they like for the new year, and why that particular strategy is top of mind when it comes to investing in 2020. Here’s the list:
Sam Huszczo, Founder and Head of Investment and Research at SGH Wealth Management; Southfield, Michigan:
ETF Pick For 2020: Invesco BulletShares 2021 High Yield Corporate Bond ETF (BSJL)
“Target-maturity bond ETFs are one of the best-kept secrets in the ETF-verse, and by giving the investor control over when the diversified basket of bonds mature, it creates fixed income strategies that many did not have access to in the past with mutual funds.
“Due to the high correlations between high-yield bonds and the stock market, it may be prudent to have one's riskier bonds mature near a time frame where there could be market volatility. If emotions take the better of investors in 2020, we would anticipate less of a downside run on these shorter-term issues, and potentially create a trading opportunity to extend duration at that time.
“Target-maturity bond ETFs give that level of control in a diversified package, and in the meantime, you are clipping a pretty nice coupon.”
BSJL invests in high-yield corporate bonds with effective maturities in 2021. The fund has nearly $1 billion in total assets under management, and costs 0.42% in expense ratio, or $42 per $10,000 invested.
Vance Barse, Wealth Strategist and Founder at Your Dedicated Fiduciary; San Diego:
ETF Pick For 2020: Invesco S&P 500 Pure Value ETF (RPV)
“For 2020, I will diversify equity portfolios by including an allocation to the Invesco S&P 500 Pure Value ETF (RPV).
“Value equities have been largely out of favor since quantitative easing began. But given the lofty P/E [price-earnings] ratios of growth stocks, 2019 performance in domestic equities, and the Federal Reserve’s three cuts in interest rates this year, RPV may be a great way to diversify an equity allocation should value come back into favor.
“That said, there are several low-cost and tax-efficient value ETF options available, so please talk to your financial advisor before making any investing decisions.”
RPV is only one of 65 value ETFs on the market today, the biggest being the Vanguard Value ETF (VTV), with $54 billion in assets. RPV, which tracks an index that covers about a third of the S&P 500's market cap, selected by various value metrics, has $1 billion in total assets and costs 0.35% in expense ratio.
Matthew Carvalho, Chief Investment Officer at Cardinal Point Wealth; Irvine, California:
ETF Pick For 2020: Alpha Architect Value Momentum Trend ETF (VMOT)
“During the latter part of 2019, we started looking for unique types of exposures that would provide meaningful diversification to a portfolio in the event stocks fell and fixed income didn’t provide much benefit because rates are already so low.
“There are several reasons I find a fund like VMOT interesting.
“First, it’s a very pure way to gain value and momentum stock exposure with different measures than most other factor funds. Second, it’s roughly 50% international exposure, and sooner or later those markets will outperform the U.S. Third, it’s relatively concentrated in a small number of names, and while that’s not something I normally encourage, as a small position, it could provide a return stream that will be meaningfully different than cap-weighted indexes dominating our typical exposure.
“Lastly, if markets were to experience the pullback everyone has been predicting for several years, the trend overlay will put on full market hedges, with the goal of avoiding the worst of prolonged, significant drawdowns.
“I must caution, this fund is not for the faint of heart! A sideways market can lead to poor performance. Yet, heading into 2020, ETFs with some potential embedded protection like this are something we are interested in.”
VMOT is an ETF of ETFs that owns value and momentum ETFs in a portfolio that’s equal-risk-weighted. The fund, which can hedge its exposure in down-trending markets, isn’t cheap, at 0.80% in expense ratio, or $80 per $10,000 invested. VMOT is still relatively young, having launched in 2017, and it has $78 million in assets.
Dave Garff, President at Accuvest Global Advisors; Walnut Creek, California:
ETF Pick For 2020: First Trust Lunt U.S. Factor Rotation ETF (FCTR)
“The U.S. is still in the top third of our Country First model, where strong fundamentals, lower risk and strong momentum outweigh a high relative valuation.
“Despite the fact that owning low-cost beta has been the best trade for the last decade, we think that there may be important changes in leadership coming to the market. Whether that is due to an economic slowdown, U.S. politics, a significant rise in interest rates, or more likely something that we don’t foresee, we think that there are potential changes in leadership coming to the U.S. market. So, we prefer a strategy that will be more nimble than just a capitalization-weighted portfolio.
“FCTR creates a portfolio from four traditional factor buckets: momentum, value, quality and volatility. What makes FCTR unique is that it will actually invest in ‘anti-factor’ buckets like low momentum or high value.
“Despite the fact that the traditional factors tend to outperform the market, sometimes it is better to invest in a low momentum bucket rather than traditional high momentum. This results in a unique portfolio because there is no way to buy a low momentum ETF, since over long time periods, that ETF would expect to underperform, and no issuer would bring it to market.
“A monthly rebalance between those factor and anti-factor groups allows the portfolio to pick up on material changes in leadership. In addition, this potentially high-turnover strategy also benefits significantly from being in an ETF wrapper. In-kind creations/redemptions mitigate what otherwise could be significant realized short-term capital gains.
“We like FCTR for three reasons: First, we like the U.S. relative to the rest of the world. Second, its unique factor composition and factor-switching strategy can react quickly to changes in market leadership. Third, the ETF structure takes what would normally be a tax-inefficient strategy, and makes it tax efficient.”
FCTR‘s rotating portfolio of stocks currently has about 180 holdings. The ETF costs 0.65% in expense ratio, and has $61 million in total assets.
John Davi, Chief Executive Officer and Chief Investment Officer at Astoria Portfolio Advisors; New York City:
ETF Pick For 2020: WisdomTree International Hedged Quality Dividend Growth Fund (IHDG)
“Investors’ love affair with past winners is insatiable. Unfortunately, yesterday’s darlings almost never outperform in the future with the same magnitude they’ve done in the past. Paradigm shifts typically happen slowly and quietly, and we think one key paradigm shift is currently taking place.
“Over the past 10 years, U.S. stocks have produced exceptionally high risk-adjusted returns, while international markets have produced substantially lower returns. But we remain steadfast that holders of U.S. stocks should hedge their risk by rotating a portion of their domestic holdings to international markets, which frankly offer better value.
“Right now, global stocks are back to swimming in an ocean of liquidity. When there is an embedded put in the marketplace, going out the risk curve has been a good risk/reward.
“IHDG screens for high quality stocks in Europe and Asia. It has outperformed EFA [iShares MSCI EAFE ETF (EFA)] by 1,000 bps [basis points] YTD, and it has outperformed SPY [SPDR S&P 500 ETF Trust (SPY)] by 300 bps in 2019. Surprised? We were when we looked. Remember, paradigm shifts typically go quietly. Admittedly, IHDG isn’t the bargain it was at the start of 2019. The days of being delta long U.S. stocks are coming to an end. Look overseas in 2020 and the years to come. You had a great 10-year run in U.S. stocks.”
IHDG is a currency-hedged basket of developed market ex-North America stocks screened for growth factors and weighted by dividends. The fund has $568 million in total assets, and costs 0.58% in expense ratio.
(Disclosure: As of the time of this writing, Astoria held a position in IHDG across a variety of its ETF portfolios and model delivery outlets. For additional disclosures, please refer to our website.)
Do you have a great investment idea?
Are you an advisor or an ETF strategist making portfolio allocation decisions this time of year? I’d love to hear your best investment ideas and top ETF picks for 2020. Shoot me a line at [email protected].
Contact Cinthia Murphy at [email protected]