By Nigam Arora
Global economic growth is slowing. The Organization for Economic Cooperation and Development (OECD) has cut its growth projection to 2.9% this year. Only four months ago, it was projecting 3.2% growth.
The new projection is the lowest in a decade. Still, this business cycle has been unusually long and therefore slower growth is to be expected. The important point is that investors who understand that will have many money-making opportunities. Let’s explore the issue with the help of a chart.
Please click here for an annotated chart of the iShares Edge MSCI Min Vol USA ETF /zigman2/quotes/203326574/composite USMV +1.13% . It’s a low-volatility exchange traded fund. Here it’s compared with the SPDR S&P 500 ETF /zigman2/quotes/209901640/composite SPY +1.23% which mirrors the S&P 500 Index /zigman2/quotes/210599714/realtime SPX +1.23%
Please note the following:
• The chart shows the low-volatility ETF has continued to outperform the S&P 500. In theory, the low-volatility ETF should underperform in a rising market.
• The reason for outperformance is two-fold. First, investors are concerned about the slowing economy and, second, lower interest rates.
• The chart shows the Arora buy signal for the market on Christmas Eve. In hindsight, Christmas Eve turned out to be the major bottom of this swing.
• The chart shows that the low-volatility ETF fell in the Arora buy zone, offering subscribers a great opportunity to buy it.
• The chart shows that during the market swoon in May, the low-volatility ETF barely budged, while the S&P 500 fell about 8%. This is the magic of low volatility. Similar conclusions can be drawn by comparing the low-volatility ETF to the Invesco QQQ Trust /zigman2/quotes/208575548/composite QQQ -0.27% which tracks the Nasdaq-100 ETF Index, and the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA +2.17% .
• The chart shows that during the market weakness in late July and early August, once again the low-volatility ETF outperformed the S&P 500.
• Often low volatility is associated with utilities and consumer staples. However, this ETF holds many growth stocks. Of note is the difference in top holdings of the low-volatility ETF compared with SPY, QQQ and the Dow Jones Industrial Average. Apple /zigman2/quotes/202934861/composite AAPL -0.68% , Amazon /zigman2/quotes/210331248/composite AMZN -0.62% , Facebook /zigman2/quotes/205064656/composite FB -1.15% and Google holding company Alphabet /zigman2/quotes/205453964/composite GOOG +0.47% /zigman2/quotes/202490156/composite GOOGL +0.58% are among the top holdings of the S&P 500 and the Nasdaq 100. The Dow’s top holdings include Boeing /zigman2/quotes/208579720/composite BA +5.24% , UnitedHealth Group /zigman2/quotes/210453738/composite UNH +1.71% , Home Depot /zigman2/quotes/208081807/composite HD +0.25% and Goldman Sachs /zigman2/quotes/209237603/composite GS +8.96% .
• The largest holding of the low-volatility ETF is gold miner Newmont /zigman2/quotes/205356474/composite NEM -6.09% . Other holdings of note are Visa /zigman2/quotes/203660239/composite V +1.24% , Coca-Cola /zigman2/quotes/209159848/composite KO +2.35% , McDonald’s /zigman2/quotes/203508018/composite MCD +0.23% and Verizon Communications /zigman2/quotes/204980236/composite VZ +0.37% .
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This ETF is technically overbought. An overbought ETF is vulnerable to a dip. If a trade deal is announced with China, there may be a selloff in this ETF. Such a selloff would likely be a buying opportunity.
In practice, it is important to diversify and not just hold one ETF. USMV has had an unusually strong move this year. In general, it is advisable to wait for a pullback in the Arora buy zone. Those who are under-invested or do not want to wait can start a scale-in on a shallow dip and accumulate more on a pullback.
Disclosure: Subscribers to The Arora Report may have positions in the securities mentioned in this article or may take positions at any time. <INTERNAL-PAGE URL="/author/nigam-arora">Nigam Arora</INTERNAL-PAGE> is an investor, engineer and nuclear physicist by background who has founded two Inc. 500 fastest-growing companies. He is the founder of The Arora Report, which publishes four newsletters. Nigam can be reached at Nigam@TheAroraReport.com.