David Fabian: Growth investors have benefited from the resiliency of stocks for quite some time now. The SPDR S&P 500 ETF (NYSEARCA:SPY) has traded above its 200-day moving average for 16 straight months and nearly every modest dip is bought with gusto. However, many investors are starting to notice swirling currents beneath the surface that threaten to change the path to profits moving forward.
In 2013 the hot tickets were small cap stocks, biotechnology companies, and solar names which all produced market-beating returns. However, the market leadership has changed dramatically in just the first three months of 2014. We are starting to see a confirmed shift to defensive areas of the market that has altered sector momentum and may perhaps even lead to more volatility.
Fortunately, there are a number of key strategies you can employ that will allow you to get out ahead of this near-term volatility and thrive as a result.
1. Value beating growth
Last year investors all focused on growth stocks that were posting fantastic gains despite valuations becoming stretched. However, the shift in strength this year has led to considerable outperformance in value stocks. The chart below shows how the iShares S&P 500 Value ETF (NYSEARCA:IVE) has begun to pick up momentum versus its counterpart in the iShares S&P 500 Growth ETF (NYSEARCA:IVW).
This move is characteristic of a shift to stalwart dividend paying companies such as utilities, telecommunications, and even large-cap technology firms with cash-rich balance sheets. My favorite ETF to play this value opportunity is through the First Trust NASDAQ Technology Dividend ETF (NASDAQ:TDIV). This ETF is chocked full of technology and telecommunication stocks with large cash positions, mature business models, and established dividend histories.
TDIV just recently made new highs this year and is continuing to show signs that the upward trajectory is firmly in place. If institutional investors continue to reposition their portfolios to take advantage of value stocks this year, I expect this ETF will benefit from that shift.
2. Consider alternative asset classes for diversification
Another sector that has been the beneficiary of re-positioning this year is REITs. The Vanguard REIT ETF (NYSEARCA:VNQ) is in the top five ETFs for new asset inflows in 2014 with nearly $2 billion. VNQ has gained over 11% to start the year and pays a 30-day SEC yield of 3.63%. This sector has been buoyed by lower interest rates, has continued to show strong relative momentum, and has been largely unaffected by broader equity volatility this year.
I consider REITs to be an alternative asset class because their returns are often times non-correlated with traditional stock market indices. They may offer an opportunity for additional growth and income this year in the context of a diversified portfolio. One of the advantages of VNQ over other ETFs in this sector is that it charges a miserly expense ratio of just 0.10%. That should please even the most fee-sensitive investor who is looking to gain exposure to a basket of publicly traded real estate companies.