By Salvatore J. Bruno, Chief Investment Officer, IndexIQ.

Sal Bruno, Chief Investment Officer at IndexIQ.

After what had been a tumultuous 2019, the end of the year is bringing significant progress on a number of fronts that have had investors on edge for months. As the year came to a close, we saw:

• Bipartisan agreement on the US-Mexico-Canada trade agreement commonly referred to as USMCA;
• Phase one of a US/China trade deal;
• Strong jobs report numbers;
• Greater clarity on the Fed’s outlook;
• Passage of a $738 billion military spending bill; and
• A landslide UK election that makes a 2020 Brexit all but certain.

All of this has us generally positive on what’s in store for investors next year. In fact, if gross domestic product growth (GDP) bottoms out at 1% and starts to reaccelerate, we will look back at the start of 2020 with 20/20 hindsight as being the soft landing many have been looking for over the past several years. Instead of being late in the current cycle, we may very well have just kicked off a brand new one.

Still, risks remain and even amidst all these bright spots, we think it’s very likely 2020 will see a dramatic uptick in volatility, driven largely by what will be a rancorous US presidential election. With that in mind, we’ve put together three strategies to help investors navigate the coming year.

2020 ETF Strategy #1: Follow the “smart money” to liquid alternatives

Though the long-term trend lines might look calm, the day-to-day is going to get bumpy next year. Numerous institutional investors are already using liquid alternatives for their volatility dampening properties to smooth out market gyrations.

In fact, according to a recent study from Greenwich Associates commissioned by IndexIQ, institutional allocations to liquid alternative ETFs will rise from $47 billion to $114 billion over the course of the next 12 months.

There’s wisdom in this crowd, and investors may want to consider the potential diversification benefits of liquid alternatives for their own portfolios.

2020 Strategy #2: Get active in fixed income

Interest rates are at painfully low levels and unlikely to budge anytime soon. If they haven’t already, 2020 will be the time for ETF investors to get active with their fixed income exposures, or, at the very least, to move beyond traditional market cap-weighted approaches that will continue to eke out paltry yields.

There has been an explosion of unique factor-based bond ETF approaches to come to market recently, as well as a growing contingent of best-in-class active managers who have started to make their strategies available to investors in an ETF wrapper. There’s really no need to settle for returns that mimic the “Agg” when so many compelling options are now available.

2020 Strategy #3: Dust off your passport and go international

Investors have had compelling reasons to stay close to home the past few years. But now, with greater clarity emerging around Brexit and movement on a China/US trade deal, it’s time for investors to broaden their horizons and consider upping their international equity exposure.

However, though some risks may have lessened, currency risk never really goes away. So even as investors are taking a fresh look outside the US, they should do so with an eye on effective strategies to hedge currency risk from their international equity exposures.

(The views expressed here are those of the author and do not necessarily reflect those of ETF Strategy.)