Ask a random group of people what they’d do with $10,000, and you’ll get a bunch of different answers. A beachy vacation in Bora Bora, a start on a long-delayed bathroom renovation, tickets to the next World Cup. Ask a few professional investors, and you’ll get investment hints. Three leading wealth advisors recently shared their top ideas with Bloomberg, and I’ve taken them a bit further to help you put them into action.
Idea 1: Quality stocks.
Russ Koesterich, a portfolio manager at BlackRock, sees inflation and growth in the US both coming down this year. That’s why he says it makes sense to gravitate toward high-quality companies that can deliver predictable earnings regardless of the big-picture backdrop. Historically, slowing growth has been better for less risky –or lower volatility –stocks. But Koesterich takes this a step further, and suggests focusing on firms that display “low fundamental volatility” – that is, companies that demonstrate consistent revenue and earnings growth, stable profit margins, low debt burdens, high returns on equity, and so on. His research shows that those kinds of stocks tend to outperform when economic growth fades.
Here’s an ETF that could offer a good starting point.
The iShares MSCI USA Quality Factor ETF (ticker: QUAL; expense ratio: 0.15%) captures companies with the fundamental characteristics Koesterich is looking for. It has $38 billion in assets and counts Nvidia, Visa, Meta, Microsoft, and Mastercard as its top five holdings.
And here’s my take.
Koesterich makes some valid points, but as the saying goes, there’s no such thing as a free lunch – and that’s especially true in investing. Put differently, high-quality stocks trade at richer valuations to reflect all those positive attributes. The QUAL’s trailing price-to-earnings (P/E) ratio, for example, is 28x – which is 22% higher than the S&P 500’s average of 23x.
What’s more, the ETF counts some Big Tech firms among its top holdings, so its performance closely mirrors that of the S&P 500, given that the broader index is similarly influenced by these leading names. As a result, investing in QUAL could expose you to market-like returns at a premium – both in terms of a higher expense ratio and the richer valuations of the underlying stocks. Remember: the ETFs that track the S&P 500, like the iShares Core S&P 500 ETF (IVV: 0.03%), are dirt cheap
QUAL’s total return performance has moved in lockstep with the IVV, an ETF tracking the S&P 500. But the IVV costs a lot less in fees. Source: Bloomberg.
Having said that, adopting a quality investing approach in this environment probably still makes a lot of sense. The strategy avoids the risks that come with deep value or growth investing, and has generally worked well in the past. And while an ETF might not be the best way to go about this, you could screen for individual stocks that display quality characteristics, leaving you with a manageable list of promising investment candidates. But it’s important that you treat the list as a starting point of ideas for further analysis, not as a menu of investments to blindly pour your money into.
Idea 2: Emerging markets.
Sarah Ketterer, CEO of Causeway Capital Management, told Bloomberg that emerging market (EM) stocks have the most attractive performance potential she’s seen in years, thanks to their historically low valuations, better relative growth rates versus the US, and the prospect for gradually shrinking interest rates. What’s more, China’s weight in the MSCI Emerging Markets Index has dropped from 39% at the start of 2021 to 25% today. That means the index is no longer dominated by Chinese stocks and the headaches they might bring, with the country’s economic slowdown and continued regulatory crackdowns in certain sectors.
Here’s an ETF that could offer a good starting point.
With $75 billion in assets, the iShares Core MSCI Emerging Markets ETF (IEMG; 0.09%) is one of the biggest funds tracking EM stocks. Its top five geography weights are China (23%), India (19%), Taiwan (17%), South Korea (12%), and Brazil (5%).
And here’s my take.
I like EM stocks for several reasons. First, as Ketterer alluded to, they’re cheap. Based on forward P/E ratios, the MSCI Emerging Markets index currently trades at a 43% discount to the S&P 500 – far steeper even than the 34% average seen over the past ten years. And yet, a consensus of analyst estimates indicates that EM firms should have higher sales and earnings-per-share growth over the next couple of years.
Second, with the Federal Reserve (the Fed) expected to soon begin cutting interest rates, global liquidity should improve and the US dollar should weaken – which are historically good indicators for EM outperformance.
Third, I like how an EM ETF gives you diversified exposure to different geographies, each with its own unique characteristics. Chinese stocks are deeply undervalued. India’s stock market is a high-growth play, driven by excitement over its rapidly expanding, consumption-driven economy (supported by the country’s young and growing population). The tech-heavy markets of Taiwan and South Korea, meanwhile, are seeing their world-leading semiconductor companies benefit from the booming demand for all things AI. Finally, Brazil’s market is dominated by energy and mining companies that offer investors a lot of income (the MSCI Brazil index, for example, has a 6% dividend yield).
Idea 3: Corporate bonds
Emily Roland, co-chief investment strategist at John Hanco*ck Investment Management, views investment-grade corporate bonds as one of the best ways to generate income in today’s economic climate. What’s more, unlike short-term bonds or cash, corporate bonds – which have an average maturity of 10.6 years – allow investors to lock in an attractive income stream for an extended period. And with US stocks looking expensive, getting paid some income while you wait for a dip might not be a bad strategy – especially if Roland is correct and the US economy and its stock market are both headed for a downturn.
Here’s an ETF that could offer a good starting point.
The iShares iBoxx $ Inv Grade Corporate Bond ETF (LQD; 0.14%) is a popular fund that’s purely focused on investment-grade US corporate bonds. It has $32 billion in assets and boasts a dividend yield of 4.3%.
And here’s my take.
I like the idea of getting paid while waiting for some interesting investment opportunities to present themselves. And with bond yields a lot higher today than they were for most of the past decade, you can actually earn a decent income from them. LQD’s current dividend yield, for example, is the highest it’s been since late 2011.
In addition to income, there are a few other reasons why adding bonds to your portfolio could be savvy.
First, capital appreciation. Bond prices can rise for several reasons –including a fall in interest rates or an improvement in the issuer’s credit conditions (leading to a lower default probability). Both of those factors are in play today, with the Fed widely expected to begin cutting interest rates this year and the US economy’s resilience to date already boosting corporate profitability.
Second, diversification. Bonds’ correlation to other asset classes such as stocks and commodities tends to be low. So adding them to a portfolio can make it more diversified, reducing its total volatility and improving its risk-adjusted returns.
Third, potential hedge. Bonds tend to display safe-haven properties and can help protect investors against economic slowdowns, deflation, rising stock market volatility, and/or falling stock prices. That’s especially true for government bonds, sure, but corporate bonds do tend to outperform stocks and other risky assets during market upheavals.
