The Great Rotation
and our investment picks to play it
So far this year, we've observed standout performance in Energy, Healthcare, and Financials. Over the past month, we've seen a clear shift away from tech and AI-focused stocks—particularly the group known as the 'Magnificent 7.' While we don't think the tech story is over, this shift highlights an important change in where investors, including us, are placing their bets.
Markets have grown more unpredictable, prompting us to look for safer and more balanced investment opportunities. Even though the overall market has dropped about 4.5% this year, many stocks and sectors have remained resilient, reinforcing our belief in the importance of diversifying investments.
What's Happening in the Market
The US market faces challenges from policy uncertainty, mainly due to concerns about tariffs and slowing economic growth. These factors have contributed significantly to recent market downturns. During times like these, we believe actively selecting the right sectors and stocks is crucial.
Rotation, Not Retreat
The market has been skewed towards investing in AI and technology stocks for the past two years, but are now diversifying across sectors like energy, financials, healthcare, and industrials. We aren't giving up on stocks; instead, we're think we should also adjust where we invest.
Financials: Regulatory changes could help banks and financial companies return more money to their shareholders through dividends. We see this as an opportunity to invest more in financial stocks.
Energy: Energy companies continue to perform well due to strong oil prices and clear earnings visibility. We're particularly interested in companies that manage their finances carefully and generate solid cash flows.
Healthcare & Industrials: These sectors typically hold steady even during market volatility. Healthcare, in particular, offers consistent demand due to demographic trends and ongoing medical needs.
Dividend Growth is Strong
We remain concerned about earnings but don't think that growth will stall to such an extent that dividend-paying companies will start to slash dividends. Despite uncertainties about economic growth and company earnings, companies paying dividends continue to perform well. Dividend growth remains robust at around 5%, and we believe businesses that consistently grow dividends will fare better during uncertain market conditions.
Focus on Low-Volatility Stocks
Given the current market fluctuations, we prefer stocks with lower volatility—those less likely to experience significant price swings. These types of stocks can protect our portfolio against large losses while still offering steady growth.
The Bottom Line
We expect market uncertainty to continue, but sector rotation presents clear investment opportunities. The recent market declines have made valuations more attractive, and dividend growth prospects remain solid. Our current approach focuses on investing in energy, financials, healthcare, and industrials—especially in stable, dividend-paying companies.
Based on the above, we curated a few ETF picks, and list of individual stock picks.
ETF Picks
SPLV (Invesco S&P 500 Low Volatility ETF): This ETF selects the 100 least volatile stocks from the S&P 500, making it suitable for investors like us looking to minimize risk and volatility.
SPHD (Invesco S&P 500 High Dividend Low Volatility ETF): This ETF provides a combination of high dividend yields and low volatility by selecting 50 of the least volatile, highest-dividend-paying stocks from the S&P 500, aligning perfectly with our strategy for stability and income potential.
Here’s a look at the YTD comparison between these two ETFs and the SPY (S&P 500 ETF).
Our individual stock picks are below.