Why Equity ETFs May Be Worth Considering Now

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Why Equity ETFs May Be Worth Considering Now

The S&P 500 has been on a rollercoaster ride in recent weeks, plummeting significantly in early October only to make partial recovery moving into November. The broad increasing trend that has been in play since early in 2018 seems to have been reversed, or at the very least knocked off kilter, in recent weeks. Understandably, investors may be wary of investing in stocks at this time, with some predicting the worst recession in decades.

Analysts, on the other hand, say that the economy of 2018 is not quite as terrible as the economy of 2008. According to a new analysis on ETF.com by Astoria Portfolio Advisors’John Davi, there are a few reasons why investors should still consider stocks, especially equity exchange-traded funds (ETFs).

Strength of Fundamentals

According to the research, the S&P 500’s forward P/E ratio is 15.7, which is “just not pricey.” Higher interest rates mean greater competition for equities, but Davi contends that “at such levels, US stocks are much more appealing than bonds.”

Buybacks Approaching

With the completion of the corporate earnings season and the end of the blackout period, investors should anticipate stock buybacks to start soon. Stock buybacks may result in short-term rises in stock prices as profits per share levels rise. According to the estimate, the most recent earnings season in the United States would see a 25% increase in profits, producing one of the best quarters overall in more than a decade.

Impact of the Midterms

After the midterm elections in early November, the United States may expect a divided Congress for at least the next two years. While this does not necessarily mean anything for the stock market, there are grounds to think that it may have a beneficial impact on equities performance. A split Congress, in particular, may result in a shift in tone on trade policies with China and other countries across the globe.

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What This Means

Astoria Portfolio Advisors suggests reducing fixed-income and emerging market equity holdings, as well as maintaining an underweight stance to bonds, in the research. Davi cites the Vanguard Mortgage-Backed Securities ETF (VMBS) as one that his business has departed due to its 100% exposure to AAA bonds during a seven-year period. “We are keeping duration as low as feasible in an environment of rising inflation and higher interest rates,” he adds.

Astoria has moved its focus to dividend growth products like the WisdomTree US Quality Dividend Growth Fund (DGRW) to give exposure to firms with strong return on equity (ROE) and return on assets (ROA) (ROA).As of the end of September, DGRW had a ROE of 19.5%, compared to 15.6% for the S&P 500.

Simultaneously, Astoria is shifting away from developing market stocks. Davi says his firm “still believes[s] EM stocks serve a place in a globally diversified multi-asset portfolio,” but that with the MSCI Emerging Markets Index trading at a 40% discount to the S&P 500, “EM stocks are a value play,” and that “value and momentum stocks have historically exhibited negative correlation.”

Overall, Astoria sees U.S. stocks as a viable option in the coming months, at least in the near run. Following last month’s pullback and the adjustments mentioned above, this field of names may be on the rise in the short future. ETFs focusing on this group of equities may be prepared to recoup losses from the recent slump.

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