With 2018’s year-end sell-offs in U.S. equities, investors are giving value investing another look as growth and momentum slowly make their way to the exits thus far in 2019. A byproduct of a shift to value is a focus on the quality of investments – being selective and using due diligence as screeners to find the best-performing investments – something that Mark Hackett, Chief of Investment Research at Nationwide, knows all about.
During the volatile moments of the market, investors were quick to react to news-trade wars, inverted yield curves and now government shutdowns. It’s the type of noise that muddies the minds of investors and disconnects them from the fundamentals of an asset.
“There’s always going to be noise,” Hackett told ETF Trends. “At certain times, they’re more reactive to that than others.”
“You get this momentary dislocation that’s reinforced by negative sentiment among investors,” added Hackett.
Part of that noise is also rising interest rates. The Federal Reserve didn’t show much dynamism in 2018 with respect to monetary policy, obstinately sticking with a rate-hiking measure with four increases in the federal funds rate.
That appears to have changed given the current economic landscape, and especially in the capital markets as Fed Chair Jerome Powell is now preaching patience and adaptability. Powell’s latest comments come as U.S. equities finished their worst year in over a decade – the Dow fell 5.6 percent, while the S&P 500 lost 6.2 percent and the Nasdaq Composite fell 4 percent.
“The Fed continues their incremental dovishness, with comments from Chair Powell and other Fed officials signaling patience,” Hackett noted. “This includes hints that the balance sheet normalization can be changed if the facts change. Vice Chair Clarida said in a speech that growth prospects in other economies had moderated somewhat and overall financial conditions have tightened materially.”
The Shift To Quality
As a result of 2018’s bull market run, the quality factor often goes overlooked compared to growth and value, but with market volatility still a primary consideration and many investors favoring defensive sectors, quality stocks and the related exchange traded funds are worth examining in 2019.
“There’s no doubt that the business cycle is maturing,” said Hackett. “When you get in the later stages of an economic cycle, there is a tendency for a transition from a momentum-based leadership to a more quality-based leadership.”
While investors are flocking to safe haven assets like bonds, there’s still a need for products that capture the upside potential should 2019 see a rebound for U.S. equities. At the same time, however, there’s also a need for strategies that offer downside protection built into the product.
“There’s an increasing appetite for people to want some degree of downside protection,” Hackett said. “Having some degree of insurance makes some sense at this point.”
Maximum Diversification And Low Volatility Options
Nationwide offers investors ETFs that present maximum diversification to a U.S. equities market as well as options for low volatility. The Nationwide Max Divers US Core Equity ETF (NYSEArca: MXDU) seeks to track the total return performance of the TOBAM Maximum Diversification USA Index (the “index”).
With MXDU, the advisor attempts to invest all, or substantially all, of its assets in the component securities that make up the index. Normally, at least 80% of the fund’s total assets will be invested in the component securities of the index.
With a disciplined approach to the market in mind, the index is a rules-based index that is designed to create a more diversified equity portfolio of the common and preferred stock of large and mid-capitalization U.S. companies relative to traditional market capitalization weighted benchmarks.
For investors seeking ETF options to combat low volatility, they can look to the Nationwide Risk-Based US Equity ETF (NYSEArca: RBUS) or the Nationwide Risk-Based International Equity ETF (NYSEArca: RBIN).
RBUS seeks to track the total return performance of the Rothschild & Co Risk-Based US Index. The advisor attempts to invest all, or substantially all, of its assets in the component securities that make up the index. Normally, at least 80% of the fund’s total assets will be invested in the component securities of the index. The index is a rules-based, equal risk-weighted index that is designed to provide exposure to U.S.-listed large capitalization companies with lower volatility, reduced maximum drawdown, and an improved Sharpe ratio as compared to traditional, market capitalization weighted approaches.
RBIN seeks to track the total return performance of the Rothschild & Co Risk-Based International Index. At least 80% of its total assets will be invested in the component securities of the index. The index is a rules-based, equal risk-weighted index that is designed to provide exposure to large capitalization companies in developed markets outside the U.S. and Canada with lower volatility, reduced maximum drawdown, and an improved Sharpe ratio as compared to traditional, market capitalization weighted approaches.
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.