3 ways to benefit as economy accelerates in the US and abroad – Chicago Tribune

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Studying market cycles and economic trends can help financial advisors spot areas of the market that may benefit most — and potentially lead investors to hot stocks like Amazon.com (AMZN) and Nvidia (NVDA).

Astor Investment Management uses those findings to make investment decisions for its clients. The Chicago-based registered investment advisory, which manages $2 billion in assets, taps exchange traded funds to build portfolios to fit its tactical asset allocation strategies.

“At Astor, our priority is to analyze the economic conditions, identify macro trends and make asset allocation decisions based on this output,” Bryan Novak, senior managing director for Astor, told IBD. “Finding market segments that stand to benefit from these trends, or at least help a portfolio’s overall objective, is the end goal.”

Novak, who discussed several of his top ETF picks earlier this year, offers up three funds that fit the bill for the current time. Here, in his own words, are his ETF picks and explanations for choosing them:

Based on how we see things currently, the economy has been accelerating both domestically and abroad. National PMI (purchasing managers’ index) readings on both manufacturing and service parts of the economy are as congruent as they have been in years. And we are seeing coordinated expansions in the U.S. and developed international markets. At the same time, as we move through Q4, interest rates appear to be stabilizing as the economic backdrop solidifies.

My ETF picks are directly linked to this outlook — as funds that fit a portfolio based on the current state of the market and economic cycle.

SPDR Blackstone/GSO Senior Loan (SRLN) — This State Street senior loan ETF is actively managed by Blackstone. I like senior loans in this environment for a few reasons. Credit conditions continue to be supportive as the economy continues to accelerate. Additionally, as interest rates no longer look to be going down and (with) spreads potentially widening, senior loans with short-term resets should help mitigate much of the duration risk if rates move higher.

If we maintain the pace of growth, or (are) at least in the ballpark, this should be supportive for the loan market. If interest rates start to move higher with the economy stable, this should help balance out a portfolio with higher correlated duration sensitivity to Treasuries. SRLN’s approximate 3.6% SEC yield should help with yield concerns, as well, for investors.

For those concerned about credit risk, this ETF should hold up better than high-yield exposure in a stressed market, as evidenced in the second half of 2015 and early parts of 2016 when oil and manufacturing weighed heavily on credit, including loans, and even equities. Another plus for this fund is that it actively manages risk, meaning it does not need to buy everything a bank loan index buys. It typically acts to cut the riskier part of the loan market out of the portfolio. That may sacrifice some yield, but helps to manage risk and volatility.

JPMorgan Diversified Return International Equity (JPIN) — This is an international developed market, multifactor ETF by J.P. Morgan Asset Management. As noted, the economy continues to improve, and that includes international developed markets. Even with the Brexit backdrop, eurozone aggregate PMI is making post-recession highs, meaning the pace of expansion is picking up. With this trend continuing, international exposure should be on the radar for investors.

What I like about this fund is the alternate screening methodology for factor exposure as well as risk mitigation, vs. the MSCI EAFE developed market index. JPIN has approximately 45% exposure to Europe vs. approximately 62% for the MSCI benchmark index. That results in overall higher exposure to developed Asia markets for JPIN than the MSCI index. Even with an improving economy globally and in Europe, Brexit concerns still remain. With reduced European exposure, this fund could help manage volatility with less exposure to Brexit-affected areas.

One other important difference is the exposure to financial services, which is about 5% in JPIN vs. 21% approximately in the MSCI developed index. With financial service firms running into issues in Europe, based on Brexit, this could also add a layer of risk mitigation for investors while keeping them exposed to the region.

ARK Industrial Innovation (ARKQ) — The last ETF of note is an interesting thematic offering from Ark Investment Management. This ETF focuses on innovative companies in the industrial space. You can think of it as a progressive view to the industrial economy. Large holdings in companies like Stratasys (SSYS), Tesla (TSLA), Nvidia, Amazon and Baidu (BIDU), to name a few, indicate the fund’s viewpoint: selecting companies that are expected to benefit from the projected trends in the industrial landscape.

(These are) companies on the edge of innovation within the industrial space that are more progressive, representing what ARK views as the future of innovation, rather than traditional stalwarts. Up over 50% year to date, this compares to approximately 17% for more-traditional industrial index fund ETFs.

In my opinion, this fund should be seen as more of an alpha or satellite holding for most investors, or those with a moderate risk profile, as it has demonstrated a higher risk profile based on the area and focus of the investments. It comes with a higher beta, or risk, compared to the S&P 500, and may fall more in a down market. However, with a changing economic landscape and companies such as Amazon, Tesla, Google, etc., changing the way business is done, and with changing consumer buying habits, this ETF represents exposure to the evolving landscape. A thematic approach finding these companies can be beneficial.

Each of the ETFs can have benefits to a portfolio, depending on how you view the markets and what your risk profile is.

This story originally appeared on Investor’s Business Daily.

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