Why we’re playing defense

Go long…but safely.

That sums up our investment strategy this month. As a result, we like the following funds: the iShares MSCI USA Minimum Volatility ((USMV)), the iShares MSCI EFAE Minimum Volatility ((EFAV)), the Vanguard Mega-Cap Value ((MGV)), the iShares US Telecommunications ((IYZ)), the VanEck Vectors High-Yield Municipal Bonds ((HYD)), and the VanEck Vectors JPMorgan Emerging Market Bonds ((EMLC)).

In our view, 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.

Playing Defense

We think 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 healthcare.

Both of these ETFs use this same philosophy. The only difference is that USMV holds companies based in the US, 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 we think telecom has been one of the few bright spots through the recent season of earnings, showing very strong growth over the last year.

Fixed Income

Lastly, we also like two fairly aggressive bond sectors: high-yield municipal and emerging market bonds.

Both of these ETFs (that is, HYD and EMLC mentioned above) pay fairly high yields – 4.57% and 5.38%, respectively.

They also have government backing, which, in our view, increases their safety to a degree.

Tough Environment

Why are we so defensive?

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 in the chart 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, in our view, there needs to be a sustained close above the dotted line, which marks the most recent previous peak in the (FTSE All World Index).

We think that as long as the close stays below that line, it will remain technically in a downtrend.

Cyclical Trends

Historically, we think that 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), we don’t think it make sense to be overly aggressive.

Also, as it relates to political cycles, we believe that the 4th year of a second term has a track record of being the overall worst for the stock market.

Brexit Risk

In less than two months, the UK will be voting on whether or not it wants to exit the European Union.

If this happens, we think it has the potential to really shake up global markets.

In our opinion it’s likely that this news story will become more and more dominant in the coming weeks and could make investors more fearful than they are currently.

Photo Credit: Rob Deutscher via Flickr Creative Commons


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