Picking the right ETFs for any occasion

Summer, as movie goers know, is the season of sequels. Or, haven’t we seen this movie before? Both are appropriate for investors, too, possibly causing them to feel that more volatility and turmoil lie ahead.

On the other hand, some investors have been happy enough with how markets outside of Canada have been rolling. But there are certainly plenty of recent disturbing plot points for them to mull over.

For instance, the U.S. Federal Reserve is finally poised to remove the proverbial punch bowl — a.k.a. stimulus. The economy five years on still isn’t strong enough to stomach a complete removal, but merely supplying or even just promising a diminished supply of punch is enough to scare investors.

Overseas, the European Central Bank’s summer 2012 saying of “whatever it takes” has recently been deemed unsustainable by none other than the Bank for International Settlements.

In China, little on the constructive side has been heard in a while — other than an acknowledgement that difficult liquidity conditions need addressing.

And Japan — after a significant surge in equity prices courtesy of higher inflation targeting — must now follow up with more tangibles to convince investors that an their ever-elusive corner has finally been turned.

As far as your portfolio is concerned, your choice of ETFs depends on what your beliefs are about the market.

If you believe markets may be challenged anew this summer, but not necessarily by a continuation of rate-driven fears, consider: bond ETFs after their meaningful pullback; minimum volatility or low-beta ETFs to hopefully dull any downside; ETFs featuring a meaningful reduction in their correlation with broader markets; and, finally, some yellow metal, which, while much maligned of late, could fare better in its traditionally stronger seasonal period ahead.

Of course, from a top-down asset allocation level, reducing equity exposure will also provide you with a buffer, in case things get uglier.

If you’re in the “everything is fine camp,” consider what has worked in the past, namely an outperforming U.S. market and currency. When adding U.S.

Choice of ETFs depends on market beliefs

exposure, preferably look for unhedged ETFs.

you may also want to look at what was working well until the correction started in the third week of May, including ETFs that have broad international exposure and perhaps even ones with broad emerging markets exposure.

This type of investor should also look at the materials and energy sectors, which should eventually benefit from some sector rotation if recent market action is supplanted by renewed hopes of a growth rebound kicking off in 2014.

Finally, if you’re in the “song remains the same” camp, you believe the quest for yield will continue to remain acute, given that removing some of the stimulus is a far cry from actually tightening.

Under this scenario, you will want to revisit some of the recently hardhit areas such as REITs, high-yield and emerging-market bonds, dividend plays and emerging-market equities.

Remember that everything you consider requires a review of how you are currently positioned and how that lines up with the scenarios that could play out in coming months. But be prepared not to fully commit to any one outcome. The key investment requirement for some time to come may well be to remain adaptable.