ETFs: The ‘Easy Button’ for Diversification in a Volatile Market
As 2024 unfolds, the market landscape has become increasingly unpredictable, urging investors to seek out diversification and stability. While some anticipate a “stock picker’s year,” many are opting for the ease and breadth of exchange-traded funds (ETFs). This year, net flows into ETFs have surged, exceeding $200 million in the second quarter alone, according to Fidelity, bringing the total to an impressive $404 billion — an 85% increase compared to the first half of 2023. This growing popularity stems from the fact that ETFs hold a collection of securities, offering a broader diversification than a single asset, making them attractive to a wide range of investors.
Key Takeaways:
- ETF flows have surged in the first half of 2024, indicating a growing preference for diversification in a volatile market.
- Experts recommend specific ETFs for long-term investment based on market trends and diverse asset classes.
- ETFs offer a convenient and accessible way for investors to gain exposure to various asset classes and geographies.
Exploring Top ETF Picks for Long-Term Investment
Tariq Dennison, co-founder and investment advisor at GFM Asset Management, highlights the appeal of ETFs for even seasoned investors, calling them the “easy button” for accessing diversified portfolios across different geographies and themes. “Even professional investors — including managers of some of the world’s largest funds — use ETFs,” he told CNBC Pro. Dennison shares his top ETF picks for investors seeking to allocate $50,000 for long-term growth.
Small-Cap Value: A Niche for Growth
Dennison advocates for a long-term, buy-and-hold strategy for small-cap value ETFs, particularly during periods of market uncertainty. Two standout options in his portfolio are:
- Avantis International Small Cap Value ETF (AVDV-US): This ETF targets non-U.S.-listed developed small-cap companies with a focus on undervalued stocks and high profitability ratios. With holdings like Marks and Spencer and Swissquote, the fund has delivered strong performance, up around 7.83% year-to-date, exceeding its benchmark MSCI World ex-U.S. Small Cap index by 2.3%.
- Dimensional US Small Cap Value ETF (DFSV-US): Dennison highlights this ETF’s ability to access niche corners of the market, including companies like Abercrombie & Fitch, Cadence Bank, and Commercial Metals. This strategy aligns with the recent surge in interest in the Russell 2000 index, which has seen significant gains. The Dimensional US Small Cap Value ETF currently stands around 6% higher year-to-date, closely tracking its benchmark MSCI USA Small Cap index.
Global Equity Multi-Factor: Balancing Diversification and Performance
Stepping beyond the small-cap niche, Dennison favors the JPM Global Equity Multi-Factor UCITS ETF (JPGL-IT, JPGL-DE, JPGL-CH) for its holistic approach to global equity exposure. This ETF boasts a diverse portfolio including both U.S. and international companies such as Arista Networks, Walmart, Deutsche Telekom, ASM International, and Novo Nordisk. Its advantage lies in combining U.S. and non-U.S. exposure within a single fund, eliminating the need for investors to assemble multiple ETFs to achieve similar diversification. The ETF has strong year-to-date returns of around 10%.
Fixed Income: Navigating the Bond Market with Caution
Dennison acknowledges his preference for individual bond investments, however, he recognizes the value of fixed income ETFs for diversifying across global bonds and hedging currency risks. He recommends:
- Dimensional Global Core Plus Fixed Income ETF (DFGP-US): This ETF offers a global bond diversification strategy with a target duration of around six years. This appeals to investors who seek to protect their portfolio against currency fluctuations while diversifying across global markets. It has returned 1.53% year-to-date.
- Vanguard USD Corporate Bond UCITs ETF (VCPA-GB): This ETF caters specifically to investors outside the U.S., providing tax-friendly exposure to the U.S. corporate bond market. This ETF has shown a higher return, at 2.53% year-to-date.
ETFs: A Catalyst for Long-Term Growth in a Volatile Market
Dennison’s recommendations exemplify the growing trend of investors seeking out reliable and diversified ETF strategies in a volatile market. These ETFs enable investors to access various asset classes and geographies, potentially maximizing returns while managing risks. As market uncertainties persist, ETFs are poised to play a critical role in investors’ long-term portfolio building strategies.
