The Fed just kicked off its long-awaited rate-cutting cycle in September. What are the best ETFs for this environment?
Positioning your portfolio in an era of falling rates isn't always easy. Investors are confident the central bank can pull off the soft landing and stocks can keep moving higher. Is that confidence justified?
Such a shift could create opportunities for strategies that allow for investment upside, yet protect against downside risk. Whitney Massey, a wealth advisor with The Reserve Investments, which manages more than $600 million in client assets, sees it similarly.
Her firm specializes in retirement and financial planning for both individuals and businesses. She focuses on due diligence and risk management in the investment research process. These are factors likely to become more important as the economic landscape continues to shift.
Fed Chair Jerome Powell insists that the economy is still in good shape. He's suggesting rate cuts are simply a means of bringing policy back into balance. On the other hand, the unemployment rate is creeping higher. And the consumer credit market appears to be getting worse.
Best ETFs Focus On Portfolio Protection
Competing economic forces make the range of possible outcomes very wide. The global economy could soon re-accelerate. Or it could drift closer to recession.
That's why Massey believes in managing for risks that are likely to be present in either situation. These risks are inflation, volatility and taxes. "With inflation expected to remain high and volatile, we've been looking for strategies that lessen our reliance on traditional fixed income and offer real returns," she said.
You'll see these ideas of portfolio protection and the use of alternatives in what Massey thinks are the best ETFs at the moment.
Targeting Built-In Downside Protection
There are a number of ways that investors can put downside protection in their portfolios. But Massey prefers the idea of protective put options.
This is the approach used by the Aptus Collared Investment Opportunity ETF. Its core actively managed strategy targets high-quality U.S. stocks of all sizes. The ETF also adds a put option designed to profit if markets decline.
"This strategy offers protection on the downside while still giving exposure to market gains. The active management aspect allows the manager to profit from put options during market declines, reinvesting those profits into undervalued stocks," she said. "This ETF essentially lets investors own equities with built-in protection, which can enable a shift in portfolios toward more stocks and fewer bonds, all while keeping risk neutral. ACIO fits this need perfectly."
Presidential Election Presents Risk And Opportunity For Best ETFs
Stocks have a history of becoming volatile right around presidential elections. There's uncertainty surrounding what future economic policy could look like. Massey says focusing on value and quality in these situations can position portfolios to benefit regardless of the outcome. In this situation, she likes the Opus Small Cap Value Plus ETF.
The fund concentrates on small-cap, dividend-paying companies, which are often overlooked, she says. "It offers consistent performance in a sector known for volatility by focusing on small-cap companies with solid earnings, free-cash-flow growth and reasonable valuations." Over time, she says that OSCV has built a portfolio that outperforms broader small-cap indexes, but with about 20% less risk.
However, the upcoming election could give the ETF an extra boost, she says. "Small caps have historically done well after elections, and OSCV has shown it can provide stability in this otherwise unpredictable space."
Best ETFs Aim For Risk-Adjusted Returns
Massey is shifting some portfolios away from traditional fixed income. But she still says fixed income can be useful in terms of generating income and maintaining a negative correlation to equities. Bonds tend to not move in lockstep with stocks. That diversification is often a benefit in rough markets.
But investors may not want to take an either/or perspective with stocks and bonds, she says. That's why she likes the Aptus Defined Risk ETF. It's an actively managed bond strategy that pairs high-grade corporate bonds with a long-term bet on stock options.
She notes that the fund "offers steady, reliable income and gives investors the opportunity to move part of their bond allocation into a strategy that has the potential for better returns when markets are rising, thanks to its equity call component."
She says it's one of the best ETFs for investors looking to curb their downside while still enjoying upside. Gains still are important "in a high-inflation, volatile environment," she said.
Whitney Massey
- The Reserve Investments
- Wealth advisor
- Massey is looking for the best ETFs that control downside risk in case the economy slows, while not giving up too much in potential upside.
