Gridiron action: 5 ground game ideas for investors

Recent market volatility has shaken confidence. Heading into year end, we identify 5 themes for investors to consider.

The sharp sell-offs in the equity market seen in recent weeks are a reminder that markets share parallels with American football. Both reward measured ground games rather than betting on long bombs. Successful investing requires patience, discipline and keeping the end goal in mind, despite the occasional setback. The iShares Investment Strategy team discusses five investing ideas to help move the ball closer to the goal line as discussed in the latest Investment Directions.

1. Downfield: Looking past political gridlock in the U.S.

Our base case still sees strong U.S. growth underpinning the global expansion, and U.S. earnings continuing to impress. But like a quarterback looking for an open receiver, opportunities can be difficult to find. However, the U.S. midterm elections produced divided government and likely political gridlock with few long-term market implications for now. Historically, that has at times been a positive for markets. At the very least, the divided government means a number of sectors are in focus, including defense, healthcare and infrastructure.

2. Japan: Stuck at the line of scrimmage

In Japan, a weaker yen, solid corporate fundamentals, bargain valuations, a stable political environment and central bank buying support an investment case for the country. Indeed, Japanese equities are outperforming the global developed ex-U.S. equities benchmark—and are less expensive. But like a talented team that can’t quite win games, we see no catalyst for a rally and remain neutral.

3. Seek defense in emerging markets

Sometimes the best offense is a good defense, it turns out. Take emerging market (EM) assets, which have continued to struggle as decelerating global growth, along with greater macro uncertainty, has tightened financial conditions. We’re constructive on EM equities, but this year is a sober reminder of the risks of EM investing. We remain positive toward EM as valuations have cheapened this year, positioning remains light, and earnings growth remains strong. Still, investors may want to consider a minimum volatility strategy, which historically has provided some buffer during sell-offs while at the same time capturing much of the upside.

4. Play-maker: Focus on the rise of rates

The backdrop for the current environment in many respects is the rise in interest rates. After trading sideways for most of the second quarter, Treasury yields rose steadily from the end of August through the beginning of October. This was largely due to increases in real rates, rather than inflation expectations. Clearly, the market is not yet worried about inflation. Nevertheless, we continue to favor TIPS over nominal Treasuries over the long term, as well as Treasury floating rate notes. With the market currently pricing in another rate hike in December and two more in 2019, expect the focus on TIPs to continue.

TIPS real yield

5. Playing the zone: Consider momentum and minimum volatility factor investing

From the perspective of factor investing, in the current environment, we favor momentum and minimum volatility, are neutral on value and quality, and underweight size. We like momentum because it historically has tended to perform best in expansions, but has also been resilient in economic slowdowns where stable growth maintains trends. As for minimum volatility, a slowing growing economy favors this more defensive factor. Valuations are reasonable, and its relative strength markedly improved in October amid an increasingly defensive tone in equity markets. We expect the focus on momentum stocks and min vol to continue in the weeks ahead.

Funds to consider

iShares U.S. Aerospace & Defense ETF (ITA)

iShares U.S. Healthcare ETF (IYH)

iShares U.S. Infrastructure ETF (IFRA)

iShares MSCI Japan ETF (EWJ)

iShares Currency Hedged MSCI Japan ETF (HEWJ)

iShares Edge MSCI Min Vol Emerging Markets ETF (EEMV)

iShares TIPS Bond ETF (TIP)

iShares Floating Rate Bond ETF (FLOT)

iShares Edge MSCI USA Quality Factor (QUAL)

iShares Edge MSCI Min Vol USA ETF (USMV)

Chris Dhanraj is the Head of the iShares Investment Strategy team and a regular contributor to The Blog.

Carefully consider the Funds’ investment objectives, risk factors, and charges and expenses before investing. This and other information can be found in the Funds’ prospectuses or, if available, the summary prospectuses which may be obtained by visiting or Read the prospectus carefully before investing.

Investing involves risk, including possible loss of principal.

Index performance is for illustrative purposes only.  Index performance does not reflect any management fees, transaction costs or expenses. Indexes are un-managed and one cannot invest directly in an index. Past performance does not guarantee future results.

Fixed income risks include interest-rate and credit risk. Typically, when interest rates rise, there is a corresponding decline in bond values. Credit risk refers to the possibility that the bond issuer will not be able to make principal and interest payments. Non-investment-grade debt securities (high-yield/junk bonds) may be subject to greater market fluctuations, risk of default or loss of income and principal than higher-rated securities. Securities with floating or variable interest rates may decline in value if their coupon rates do not keep pace with comparable market interest rates. The Fund’s income may decline when interest rates fall because most of the debt instruments held by the Fund will have floating or variable rates.

An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency and its return and yield will fluctuate with market conditions. TIPS can provide investors a hedge against inflation, as the inflation adjustment feature helps preserve the purchasing power of the investment. Because of this inflation adjustment feature, inflation protected bonds typically have lower yields than conventional fixed rate bonds and will likely decline in price during periods of deflation, which could result in losses. Government backing applies only to government issued securities, and does not apply to the funds.

The Fund’s use of derivatives may reduce the Fund’s returns and/or increase volatility and subject the Fund to counterparty risk, which is the risk that the other party in the transaction will not fulfill its contractual obligation. The Fund could suffer losses related to its derivative positions because of a possible lack of liquidity in the secondary market and as a result of unanticipated market movements, which losses are potentially unlimited.  There can be no assurance that the Fund’s hedging transactions will be effective. Funds that concentrate investments in specific industries, sectors, markets or asset classes may underperform or be more volatile than other industries, sectors, markets or asset classes and than the general securities market.

International investing involves risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. These risks often are heightened for investments in emerging/developing markets or in concentrations of single countries.

There can be no assurance that performance will be enhanced or risk will be reduced for funds that seek to provide exposure to certain quantitative investment characteristics (“factors”). Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. In such circumstances, a fund may seek to maintain exposure to the targeted investment factors and not adjust to target different factors, which could result in losses. The iShares Minimum Volatility Funds may experience more than minimum volatility as there is no guarantee that the underlying index’s strategy of seeking to lower volatility will be successful.This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of the date indicated and may change as subsequent conditions vary. The information and opinions contained in this post are derived from proprietary and nonproprietary sources deemed by BlackRock to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. As such, no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors and omissions (including responsibility to any person by reason of negligence) is accepted by BlackRock, its officers, employees or agents. This post may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any of these views will come to pass. Reliance upon information in this post is at the sole discretion of the reader.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective. The information presented does not take into consideration commissions, tax implications, or other transactions costs, which may significantly affect the economic consequences of a given strategy or investment decision.

This post contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

The iShares Funds are distributed by BlackRock Investments, LLC (together with its affiliates, “BlackRock”).

The iShares Funds are not sponsored, endorsed, issued, sold or promoted by MSCI Inc., nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with MSCI Inc.

©2018 BlackRock, Inc. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. All other marks are the property of their respective owners.