Winning ETF Strategies for Q4

We are now in the final quarter of the year. The journey so far has been smooth (despite the coronavirus outbreak) thanks mainly to the massive fiscal and monetary policy easing. The first quarter of the year was downbeat for the market with the S&P 500 declining more than 20% and the second quarter seeing stellar growth as the S&P 500 marked its best 52-day rally in history.

The third quarter was also strong with equity gains. The period of July and August was the best in 34 years though September was volatile. All these mixed forces have helped SPY gain more than 7%, DIA remain flatand QQQ move higher by about 36.5% so far this year (as of Oct 15, 2020).

Returns in key equity gauges remain uncoordinated this year. So, investors must be interested in knowing what’s in store for Q4. This is especially true given the fact that virus woes are lingering due to rising cases in Europe and the United States. Against this backdrop, below we highlight a few ETF investing strategies.

Tap "Safe & Early" Holiday Shopping Season With Online ETFs

With the final quarter of the year underway, all eyes must have turned toward the performance of retailers as the October-November period embraces the key holiday season. As loads of sales-boosting events like Halloween, Thanksgiving, Cyber Monday, Black Friday and Christmas fall in this quartile, the sector generally sees a sales boost.

A Forbes article highlighted that market research firm Forrester sees online retail jumping 18.5% this year and attaining 20.2% overall penetration in North America. Deloitte predicts e-commerce holiday retail sales to grow between 25% and 35% from November through January, reaching $182 billion to $196 billion in total (read: Buy E-Commerce ETFs to Tap "Safe & Early" Holiday Shopping).

Shopping will be done early too as retailers would like to avert overcrowding in stores as well as the last-minute spike in online purchases that results in shipping problems. Expect a jump in the likes of ProShares Online Retail ETF ONLN and Amplify Online Retail ETF (IBUY).

Uncertainty Before Presidential Election May Create Volatility

The U.S. presidential election is scheduled in the fourth quarter. Investors need to prepare for heightened volatility in the broader equities space for this Nov 3 event. Minimum-Volatility ETFs like iShares MSCI USA Min Vol Factor ETF USMV and Invesco S&P 500 High Dividend Low Volatility ETF (SPHD) could be good picks.

Pause in Vaccine Trials Makes Quality Picks Intriguing

Major players in the race to develop a coronavirus vaccine and antibodies have been facing hurdles in the trials. Johnson & Johnson (JNJ) recently halted dosing in all the clinical studies on its coronavirus vaccine candidate JNJ-78436735. Escalating worries, Eli Lilly & Company (LLY) informed that the government-sponsored clinical trial of its COVID-19 antibody treatment LY-CoV555 is paused because of a safety concern.

AstraZeneca had also stopped its trial in September when at least one participant developed unexplained neurological symptoms. AstraZeneca, however, has since restarted the trials everywhere except in the United States. So, it is better to have a quality exposure in your portfolio and stay safe with investing strategies. iShares MSCI USA Quality Factor ETF QUAL and WisdomTree U.S. SmallCap Quality Dividend Growth Fund DGRS could be good bets.

Pandemic Surges; Technology to Rule

More coronavirus cases mean more uncertainty in health emergency and the related economic recovery. This also ensures a prolonged period of social distancing norms and a continued surge in digitization. However, FAANGs got a bashing in September mainly due to lofty valuations. Though valuations got corrected to a large extent in the recent selloff, things may remain volatile.

So, overvaluation issues are likely to bother the space intermittently. But the huge long-term prospects for cutting-edge technology demands tech stocks in investors’ portfolio. So, investors may want to opt for low P/E tech funds. ETFs like iShares Cybersecurity and Tech ETF IHAK, First Trust NASDAQ Technology Dividend Index Fund (TDIV), and Defiance Quantum ETF (QTUM) have a low P/E ratio (read: Time for Tech is Back: 5 Low P/E ETFs to Play).

M&A to Stay Strong

Mergers and acquisitions had a great third quarter as deal activities that were on hold amid the peak of coronavirus-led lockdowns opened the floodgates. A flurry of deals in September led to a record third quarter with more than $1 trillion worth of transactions globally, mostly tied to the coronavirus-proof sectors like technology and healthcare, according to Refinitiv data, as quoted on Reuters.

The upbeat deal-making mood is not likely to change totally in the fourth quarter. Interest rates will remain at the rock-bottom levels, which in turn will keep the appeal of the debt-financed deals alive. Be it “integrated debt, senior cash flow debt, asset-based financing, mezzanine debt, or unitranche debt” it all depends on interest rates. So, deals should be there in the marketplace over the medium term (read: After a Record Q3, Can M&A Soar in Q4? ETFs in Focus).

IQ Merger Arbitrage ETF MNA and ProShares Merger ETF (MRGR) are the funds that should benefit in such a scenario.

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SPDR SP 500 ETF (SPY): ETF Research Reports
Invesco QQQ (QQQ): ETF Research Reports
SPDR Dow Jones Industrial Average ETF (DIA): ETF Research Reports
iShares MSCI USA Min Vol Factor ETF (USMV): ETF Research Reports
IQ Merger Arbitrage ETF (MNA): ETF Research Reports
WisdomTree U.S. SmallCap Quality Dividend Growth ETF (DGRS): ETF Research Reports
iShares MSCI USA Quality Factor ETF (QUAL): ETF Research Reports
ProShares Online Retail ETF (ONLN): ETF Research Reports
iShares Cybersecurity and Tech ETF (IHAK): ETF Research Reports
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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