End of cycle, high volatility should convince investors to play defence, using ETFs
North American markets may be reaching the end of a cycle, but Andres Rincon says investors are having trouble letting go of their favourite momentum stocks.
According to Rincon, TD Securities director of equity and derivatives strategy, the conversation goes the same way every time. When portfolio managers recommend that investors lower their exposure to risk, they say it’s not the right time but that they ’ll consider it at a later point.
“And we all know, later never comes and we see what Bitcoin did, what Blockchain stocks have done and what marijuana stocks have done over the last few weeks.”
As interest rates rise and momentum stocks suffer from high volatility, Rincon and three other speakers at BMO’s ETF Roadshow in Toronto this week suggested that investors should be transitioning toward a defensive portfolio. One easy way to do so, they said, is through ETFs.
Perhaps the simplest defensive manoeuvre is to invest in an ETF that is comprised of trusted, largecap U.S. companies with a lower beta risk, Rincon said.
On top of investing in blue-chip stocks through ETFs, Rincon also suggested two particular sectors that investors should target: Health care and real estate. In health care, Rincon suggested, investors should look to ETFs that are equal weight on U.S. companies. That’s because many of the small-cap firms found in such funds generate most of their revenue domestically so they benefit from tailwinds of a strong U.S. economy and aren’t hurt by a higher U.S. dollar.
Real estate investment trusts offer a similar opportunity for protection and growth, Rincon said.
The performance of REITs has risen side-by-side with interest rates, Rincon said.
Investing in emerging markets has caused investors pain over the last few months, but they shouldn’t be looking to pull out of the continent, said BMO Global Asset Management ETF portfolio manager Chris Heakes.
Interest rates remain low in Europe and so investors should be looking into low-volatility ETFs that are outperforming the MSCI Europe Index by eight per cent this year, Heakes said.
In Canada, Heakes suggests a similar strategy that focuses on reducing risk.