The first half of the year was extremely volatile for the U.S. stock market. While a gradually improving economy and merger mania drove the stocks higher, a strong dollar, uncertain timing of interest rates hike and global growth concerns were the major headwinds.
And the most recent slump came from Grexit fears, which shook the stock market worldwide sending Dow Jones into the red territory in 1H. Meanwhile, the S&P 500 index is up slightly by 0.2%, which is still the worst performance in five years. Investor should note that the tech heavy Nasdaq Composite Index and the small cap Russell 2000 Index have been the clear winners, having returned respectively 5.3% and 4.1% so far (read:Â If Greece Defaults, Buy These 4 ETFs to Profit).
Amid huge volatility and uncertainty, investors should have some strategies in place for the second half in order to safeguard themselves from the downside while simultaneously cashing in on opportunities that arise over time. Here are some strategies that could prove extremely beneficial for ETF investors in the coming months:
Bet on U.S. Small Cap ETFs
As the U.S. stock market has entered into its seventh year bull run, stocks are neither cheap at the current levels nor outrageously expensive. So these are still attractive thanks to the lack of any better alternative. More gains are likely to come from the Fed rate hike plans and increased confidence in the U.S. economy.
The Fed has committed to a slower and gradual rates increase, which is not expected before late September or October, suggesting one more quarter of cheap money flows into the economy. Even if the rates rise later in the year, the initial phase of increase would actually be good for the stocks as it reflects an improving economy and a lower risk of deflation.
While the gains will likely be broad based, small caps look to outperform, as these are free from global malaise and ensure higher return on improving economic health. That said, the ultra-popular small cap ETFs offering more growth such asiShares Russell 2000 Growth ETF (IWO - ETF report), Vanguard Small-Cap Growth ETF (VBK - ETF report) and iShares S&P Small-Cap 600 Growth ETF (IJT) could be ideal choices. All three sport a Zacks ETF Rank of 1 or ‘Strong Buy’ (read: Small-Cap Stocks, ETFs Beating Russell 2000).
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Make Hot Sectors Your Friend
The three sectors – health care, technology and financials – have been the hottest with incredible performances in 1H. The trend is likely to continue as technology and health care would continue to be investors’ darlings when it comes to defensive trading while financials would be favored by a rising rate environment. Further, the trio has an edge over the other sectors given the encouraging industry fundamentals (read: 2 Hot Sector ETFs Soaring to Rank #1 This Summer).
While the three sectors are crowded with a number of top ranked ETFs, the most popular are State Street funds – Health Care Select Sector SPDR Fund (XLV –ETF report), Select Sector SPDR Technology ETF (XLK - ETF report) and Financial Select Sector SPDR Fund (XLF - ETF report) – and Vanguard funds – Vanguard Health Care ETF (VHT), Vanguard Information Technology ETF (VGT) andVanguard Financials ETF (VFH).
Be Prepared for Higher Volatility
