“You’re going to see some elevated valuations, so advisors are going to have to be more selective,” she says. “Dividend growers haven’t been the best performers over the past year. It’s worth looking into smart beta and factor investing to find exposure to pockets of attractive valuation.”
Low volatility ETFs, like the iShares Edge MSCI Minimum Volatility U.S.A. ETF (USMV) offer investors a passive vehicle designed to avoid temperamental markets, Richardson says.
Municipal bonds allow advisors to provide their clients a tax-advantaged income stream, says Richardson.
“I even think that some of these asset classes that fall somewhere between stocks and bonds, like preferreds, offer an attractive source of income,” she says.
Investors could also look globally for markets with lower valuations that may have been overlooked, says Richardson, who recommended the use of single-country funds for targeted exposure.
Even better, however, are the opportunities in emerging market debt, says Richardson. “In dollar currency terms, not the local currency, because investors don’t need to invite currency risk into their bond portfolios.”
Gold ETFs can also be used to provide portfolios with some ballast against dramatic market swings, says Richardson.
In its midyear outlook released earlier this month, BlackRock said that it is “cautious” on U.S. equities; underweight on European equities; and neutral on Japan, Asia and emerging markets.
While the firm is positive on municipal bonds, emerging market debt, and U.S. and European credit, it’s neutral on U.S. Treasurys, European sovereigns, Asian fixed-income and commodities.
“Even the VIX isn’t pricing in any of the disruption in the geopolitical landscape,” says Richardson. “There’s an enormous anti-establishment movement, not just in the U.S., but in places like Germany, France and the Philippines, that can be damaging to markets moving forward. It’s not being priced in anywhere. That’s why we’re concerned about mitigating the risk in client portfolios.”