Six ETF portfolio strategies for 2022

The Australian share market faces a volatile period ahead as the world continues to navigate the COVID pandemic.

With the rapid spread of the Omicron variant around the globe and COVID lockdowns ongoing, big questions hang over the global economic recovery.

Equity markets are expected to remain volatile, especially if new variants emerge against which vaccines don't work as well.

Central banks will likely keep interest rates near record low levels, though upward pressure is building on interest rates as inflation quickly rises in the US and Europe, posing a rising threat to the financial system.

More than ever, investors should be implementing portfolio strategies that can grow their wealth and protect against volatile markets. A convenient and low-cost way for any investor to do this is to use ASX-listed exchange traded funds (ETFs).

Diversify equity exposure

For equity investors, a core investment strategy should provide exposure to all sectors of the Australian economy to reduce risk through diversification. It is important to have exposure to companies that can maintain and grow their earnings through uncertain times.

This would include cyclical stocks such as energy without having overexposure to the big banks in portfolios. They face headwinds as interest rates rise and bank margins come under pressure.

Investors should also avoid overexposure to the big miners. BHP will become Australia's largest company early next year after announcing the unification of its corporate structure to a single primary listing on the ASX in 2022.

The miner is expected to surpass the Commonwealth Bank as Australia's biggest company and its greater weight in the S&P/ASX 200 Index could push ETFs tracking the index to become too concentrated in resources shares; it will be more important than ever for investors to adopt an equal weight investment strategy.

Use quality as defence

If the global economy does falter in 2022, stock markets too could stall. In this scenario, quality companies could outperform as they tend to offer investors protection during periods of weaker economic growth and heightened uncertainty and volatility.

Quality stocks also tend to recover quicker from equity market downturns.

Clean energy push to pay off

Investors are putting their dollars behind their values and increasingly investing in clean energy companies and their suppliers to help offset climate change. The Paris Agreement and recent UN Climate Change Conference are driving rising demand for green, renewable energy across the globe, away from polluting fossil fuels.

This is a significant long-term trend offering huge potential for gain to investors. Over the shorter term, clean energy companies could rally as the push to offset climate change becomes more urgent and countries, including Australia, recognise this urgency and invest more in the sector.

Video gaming to maintain velocity

The explosion of video gaming before and during the COVID-19 pandemic has created significant investment opportunities in global gaming companies. People are spending more time at home gaming given lockdowns and social restrictions, which are ongoing.

Research house Newzoo forecasts the global game market will reach US$218.7 billion in 2024, up from US$175.8 billion in 2021.

Positive secular trends are driving this growth, including an increasing number of gamers who also are spending more time in front f their screens, often interacting with other gamers, not surprising given continuing lockdowns and social restrictions.

Private equity market now open

With equity markets expected to remain volatile in 2022, and potentially correcting after a very strong run since March 2020, private equity is becoming important for investors' portfolios.

As an alternative investment, it displays a low correlation with equities and bonds and private equity offers attractive risk and return characteristics. In addition, we believe the opportunities are huge.

The private equity asset class is significantly bigger than the publicly listed market; an estimated 98% of companies are private while a mere 2% of companies are listed.

Go for gold

Notably, news of the COVID-19 variant Omicron sparked a global equity market sell-off on November 26.

Gold managed to hold up, despite almost every asset class falling on the news. With substantial risks to the economy and the stability of the financial system remaining as inflation rises and COVID-19 variants spread, in a worst-case scenario, exposure to gold should help weather the storm. In the best case, exposure to gold, especially through undervalued gold mining equities, could prove beneficial.

Gold mining equities perform well in a rising gold price environment and the gold price and margins are historically high presently, yet stocks are trading at historically low valuations, making them attractive to investors.

ETFs may provide an accessible entry point for investors looking to get exposure to gold miners in their portfolios as a source of defence, liquidity and diversification.

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