“Go Long, but with safety.” That seems to be the theme of the things we’re buying this month, which includes the following funds: USA Minimum Volatility (USMV), EFAE Minimum Volatility (EFAV), Mega Cap Value (MGV), Telecom (IYZ), High-Yield Municipal Bonds (HYD), and Emerging Market Bonds (EMLC).
Minimum Volatility ETFs like USMV and EFAV are designed to be long stocks but to do so in such a way as to maximize stability. These funds accomplish this objective by investing primarily in large cap companies that are in traditionally defensive sectors such as Consumer Staples, Utilities, Precious Metals, Telecom, and Health Care. Both of these ETFs use this same philosophy, the only difference is that USMV holds companies based in the United States whereas EFAV purchases international companies.
Additionally, MGV and IYZ are also defensive equity funds. The Mega Cap Value fund has many of the same holdings as USMV, but is a little more diversified into other sectors. And Telecom has been one of the few bright spots through the recent season of earnings, showing very strong growth over the last year.
Lastly, we’re buying into two aggressive bond sectors: High Yield Municipal Bonds (HYD) and Emerging Market Bonds (EMLC). Both of these pay fairly high yields – 4.57% and 5.38% respectively – but also have government backing, which increases their safety to a degree.
So, why be so defensive? Here are a few of the reasons:
- The overall global trend in stocks is still down. When stocks are in a ‘bull market’ the market will continually make higher highs and higher lows. As you can see below, over the last year, the highs and lows have been in decline. This is the basic definition of a downtrend. In order to break the downtrend, there needs to be a sustained close above the dotted line, which marks the most recent previous peak in the FTSE All World Index. As long as it stays below that line, it will remain technically in a downtrend.
- Calendar and Cyclical headwinds are here. Historically, the market tends to do very well from November through April, and not very well from May through October. As we enter the time of year when the market has a tendency to peak (early May), it doesn’t make sense to be overly aggressive. Also, as it relates to political cycles, the 4th year of a second term has a track record of being the overall worst for the stock market.
- In less than two months, the UK will be voting on whether or not they want to exit the European Union. If this happens, it has the potential to really shake up global markets. It’s likely that this news story to become more and more dominant in the coming weeks and could make investors more fearful than they are currently.
The commentary included in this blog is provided for informational purposes only. It does not constitute a recommendation to invest in any specific investment product or service. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.