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FOMO Rally Gains Momentum? ETF Strategies to Play

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While the stock market has been hovering around a record level due to the AI boom, exceeding all expectations, there are valid reasons to approach the current situation with caution. The continued excitement for AI, global growth slowdown and still-present inflationary pressure indicate potential bubbles.

Per the legendary investor John Hussman — famous for predicting the 2000 and 2008 crashes, the latest stock rally is ingrained in the extreme fear of missing out. FOMO (Fear of Missing Out) factors have surged in markets — be it in the AI space or cryptocurrency, and stock prices could decline 50-70% this cycle. His firm's most reliable indicator now tops 1929 extremes, per a Business Insider article, as quoted on Yahoo Finance.

Ripe valuations, divergence among individual stock sectors and uneven sentiment are factors to worry about, according to Hussman. Another point of caution is the growing set of stocks hitting fresh 52-week lows even as indexes themselves soar continuously.

Navigating the market during a FOMO rally with ETFs requires a combination of strategic planning and an understanding of market dynamics. Here are some steps and considerations to effectively manage ETF trading during such a market environment:

Identify Less-Speculative Sectors

First, one has to identify the sectors that are leading the rally. Technology, biotech and consumer discretionary sectors often lead during FOMO rallies. Investors can rely on safer sectors like utilities and staples. Although energy utilities have also become a good proxy of the AI boom, sectors like consumer staples, telecom and Healthcare often offer a less-volatile exposure.

Fidelity MSCI Consumer Staples Index ETF (FSTA - Free Report) , Vanguard Communication Services ETF (VOX - Free Report) and Health Care Select Sector SPDR ETF (XLV - Free Report) are some examples to play amid any market downturn.

Valuation Matters

Buying low-valuation ETFs can be a strategic investment decision. If the ETF is fundamentally sound and has a low P/E, it has the potential to revert to its intrinsic value. Investing in undervalued stocks provides a chance to capitalize on future growth. Buying low-aluation stocks is a contrarian strategy. It involves going against the crowd and can be profitable if the consensus view starts changing.

Invesco S&P 500 Pure Value ETF (RPV - Free Report) and Invesco Dividend Achievers ETF (PFM - Free Report) are two ETF bets that offer moderately low P/E ratios. RPV has a P/E of 11.15X, while PFM has a P/E of 20.01X.

Broad Market ETFs Diversify Risks

Consider ETFs that track the broader markets. These include iShares Core S&P Total U.S. Stock Market ETF (ITOT - Free Report) and SPDR Portfolio S&P 1500 Composite Stock Market ETF (SPTM - Free Report) . Both ETFs charge 3 bps in fees.

Bet on Dividends

Stocks with lower valuations often have higher dividend yields because their price is lower relative to the dividends they pay. This can provide a steady income stream, especially important in volatile markets. Higher dividends can also be reinvested. SPDR Portfolio S&P 500 High Dividend ETF (SPYD - Free Report) , which charges 7 bps in fees, yields 4.53% annually.

Quality ETFs Deserve a Look

Quality ETFs typically include companies with strong fundamentals, such as high return on equity, stable earnings growth, and low debt levels. These characteristics often lead to more stable and predictable returns over time.

Companies with solid financial health are better positioned to weather economic downturns and market volatility, providing a smoother investment journey???. iShares MSCI USA Quality Factor ETF (QUAL - Free Report) and WisdomTree U.S. Quality Dividend Growth Fund (DGRW - Free Report) are two investment options in this category.

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