For most of 2023 and 2024, stock investors didn't need to worry much about strategy or picking the best ETFs. They could just put their money in the Nasdaq 100 or Magnificent Seven stocks and get market-leading returns.
Those days appear to be over. With the U.S. economy showing signs of slowing and the global trade war adding another layer of uncertainty, choosing the right investments is more important. Previous laggards, such as health care, consumer staples and low-volatility stocks, have been delivering positive returns this year, while tech and the Magnificent Seven are in correction territory.
Timothy Thielen, a CPA, CFP and Chartered Market Technician with KSDT & Co., tends to agree. His firm's approach, which manages asset growth, income planning, risk management and tax minimization strategies, aims to uncover value and opportunity in all areas of the market. It's this willingness to look well beyond standard index-based solutions that can unlock value, says Thielen, who is the firm's director of wealth management.
A Focus On Risk Mitigation For Best ETFs
Thielen's picks for the best ETFs reflect his taste for alternatives to Big Tech. But they also aim to generate strong risk-adjusted returns as opposed to simply maximizing absolute returns. He also favors an approach that involves searching for returns beyond just traditional share price appreciation. That could include dividend income, interest payments, option income and other nontraditional sources.
That theory could apply to risk as well. By including asset classes and strategies that have different correlations and risk compared to stocks and bonds, investors can position themselves to possibly avoid some volatility in their portfolios without sacrificing return potential in the process. In other words, Thielen looks for investments that zig when markets zag.
Thielen's ETF picks for April reflect those goals.
Option Income Strategies That Boost Yield And Manage Risk
Thielen's favorite ETFs for risk-adjusted gains are a pair of funds that have been popular with investors. They are the JPMorgan Equity Premium Income ETF and the JPMorgan Nasdaq Equity Premium Income ETF.
Both funds target stocks that demonstrate favorable risk and return characteristics and lower volatility than their benchmark indexes. JEPI chooses stocks from within the S&P 500, while JEPQ focuses on those in the Nasdaq 100. Both ETFs utilize written out-of-the-money call options to generate income. While these might not generate the higher yields that some similar products do, they are designed to allow some more share price upside capture potential.
Thielen prefers these funds because he believes "They're very good at what they do." He also notes, "I feel we're in an environment where we must stack returns," returning to the idea that dividend and option income strategies provide opportunities for risk-adjusted returns. He says that, "These funds do the trick," while mentioning the NEOS S&P 500 High Income ETF, TappAlpha SPY Growth & Daily Income ETF and Eaton Vance Tax-Managed Global Diversified Equity Income Fund as alternatives.
Finding Value In Active Management For Best ETFs
One theme that Thielen follows throughout these picks is active management, where human investors choose stocks rather than tracking an index. Thielen thinks with 10%-plus corrections happening again in several areas of the market, there could be a resurgence in demand for active strategies that can try to avoid some of the higher risk areas of the market.
Thielen's choice of Davis Select Worldwide ETF reflects his preference for portfolio managers with decades of experience in active fund management. DWLD takes an old-school approach that seeks out high-conviction, best-of-breed businesses in the U.S. and abroad. The ETF seeks companies that have demonstrated above average growth, yet are deemed undervalued relative to the market. It invests with a long-term time horizon in mind and has low expected turnover in order to let some of these stories play out.
Thielen says, "I want active value management and every portfolio should have an international allocation. I leave it to the Davis team to determine when and where to buy globally." He also mentions that since its inception in the beginning of 2017, DWLD has outperformed the total return of the iShares MSCI EAFE ETF by a sizable margin, so a portfolio would have been enhanced historically by its addition.
Diversification Beyond Stocks And Bonds For Best ETFs
Many investors focus strictly on stocks, bonds and cash when developing their portfolio allocations. Thielen feels that one important asset class is being ignored in this equation — commodities. The current trade war shines a fresh light on this area of the market given how tariffs have hit steel and aluminum.
The great benefit of commodities is that they can be great risk diversifiers. That's why Thielen is a fan of Simplify Managed Futures Strategy ETF. "I love this actively-managed futures strategy because of the results they've been producing — solid, non-correlated returns," he said.
CTA can take long and short positions in stock, U.S. Treasury, commodity and foreign exchange futures contracts by considering various relative and absolute momentum signals. Currently, the fund is heavily focused on agricultural commodities and metals, but also has exposure to gasoline, crude oil and natural gas.
This fund has a long history of being able to reduce overall portfolio risk when combined with stocks and bonds. Thielen notes, "I was interested because of the team running the fund, but the results must be there — and they are. A portfolio with CTA in it has had better returns with lower volatility and smaller drawdowns."
Timothy Thielen
- KSDT & Co
- Director of wealth management
- Thielen is looking for investments that don't move in lockstep with the rest of the market, seeing them as a way to earn risk-adjusted returns.
