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The first half of the year was extremely volatile for the U.S. stock market. While a gradually improving economy and merger mania drove the stocks higher, a strong dollar, uncertain timing of interest rates hike and global growth concerns were the major headwinds.

And the most recent slump came from Grexit fears, which shook the stock market worldwide sending Dow Jones into the red territory in 1H. Meanwhile, the S&P 500 index is up slightly by 0.2%, which is still the worst performance in five years. Investor should note that the tech heavy Nasdaq Composite Index and the small cap Russell 2000 Index have been the clear winners, having returned respectively 5.3% and 4.1% so far (read: If Greece Defaults, Buy These 4 ETFs to Profit).

Amid huge volatility and uncertainty, investors should have some strategies in place for the second half in order to safeguard themselves from the downside while simultaneously cashing in on opportunities that arise over time. Here are some strategies that could prove extremely beneficial for ETF investors in the coming months:

Bet on U.S. Small Cap ETFs

As the U.S. stock market has entered into its seventh year bull run, stocks are neither cheap at the current levels nor outrageously expensive. So these are still attractive thanks to the lack of any better alternative. More gains are likely to come from the Fed rate hike plans and increased confidence in the U.S. economy.

The Fed has committed to a slower and gradual rates increase, which is not expected before late September or October, suggesting one more quarter of cheap money flows into the economy. Even if the rates rise later in the year, the initial phase of increase would actually be good for the stocks as it reflects an improving economy and a lower risk of deflation.

While the gains will likely be broad based, small caps look to outperform, as these are free from global malaise and ensure higher return on improving economic health. That said, the ultra-popular small cap ETFs offering more growth such as iShares Russell 2000 Growth ETF (IWO), Vanguard Small-Cap Growth ETF (VBK) and iShares S&P Small-Cap 600 Growth ETF (IJT) could be ideal choices. All three sport a Zacks ETF Rank of 1 or ‘Strong Buy’ (read: Small-Cap Stocks, ETFs Beating Russell 2000).
 
Make Hot Sectors Your Friend

The three sectors – health care, technology and financials – have been the hottest with incredible performances in 1H. The trend is likely to continue as technology and health care would continue to be investors’ darlings when it comes to defensive trading while financials would be favored by a rising rate environment. Further, the trio has an edge over the other sectors given the encouraging industry fundamentals (read: 2 Hot Sector ETFs Soaring to Rank #1 This Summer).

While the three sectors are crowded with a number of top ranked ETFs, the most popular are State Street funds – Health Care Select Sector SPDR Fund (XLV), Select Sector SPDR Technology ETF (XLK) and Financial Select Sector SPDR Fund (XLF) – and Vanguard funds – Vanguard Health Care ETF (VHT), Vanguard Information Technology ETF (VGT) and Vanguard Financials ETF (VFH).

Be Prepared for Higher Volatility

Bouts of volatility will definitely play foul in the stock market in the coming months given the Greece debt drama, uncertain timing of rates hike, geopolitical tensions, and a global growth slowdown. Low volatility ETFs have the potential to outpace the broader market in a bearish-to-neutral market conditions providing significant protection to the portfolio. This is because these funds include more stable stocks that have experienced the least price movement in their portfolio.

Adding some low volatility ETFs like PowerShares S&P 500 Low Volatility Fund (SPLV) and iShares MSCI USA Minimum Volatility Index Fund (USMV) to the portfolio could reduce losses in declining markets while generating decent returns when the markets rise. Apart from this, investors could also recycle their portfolio to low beta ETFs like First Trust Low Beta Income ETF (FTLB) for a safe exposure.

Go Global

Despite the combination of negative factors including the Greece crisis, Middle East tensions, slowdown in China and sluggish growth in many developing economies, international investing has been encouraging so far this year and is likely to remain do so given the ultra-cheap money flowing into the international economies (read: Grexit or Not, Buy These 3 European ETFs).

While international currency hedging strategies were in vogue in the first half, plain vanilla ETFs are expected to dominate the rest of the year, as a slower rate hike path will ease the U.S. dollar strength giving a boost to the non-currency hedged funds. Among the most interesting picks, European ETFs such as FTSE Europe ETF (VGK) and First Trust Eurozone AlphaDEX ETF (FEUZ), and Japan ETFs such as iShares MSCI Japan ETF (EWJ) and WisdomTree Japan SmallCap Dividend Fund (DFJ) could make for a compelling choices.

Emerging markets also look attractive given cheap oil prices and lower valuations. Countries like India and China will remain the major beneficiaries. As such, Vanguard FTSE Emerging Markets ETF (VWO), PowerShares India Portfolio (PIN) and PowerShares Golden Dragon China Portfolio (PGJ) deserve a closer look (read: Can Emerging Market ETFs Defy U.S. Rates Hike?).

Avoid Commodity ETFs

The weakness in broad commodities seen last year has spilled over into 2015. This is especially true in the backdrop of a strong dollar, lower oil price and weak global fundamentals that have dampened the appeal for these commodities. Additionally, continued bullishness in the stock market and an increased appetite for riskier assets are tempering demand for commodities across the globe with an extreme bearish outlook on a number of commodities like coffee, sugar, wheat, corn, platinum, nickel and copper.

The ongoing sluggishness is a good enough reason to avoid commodity ETFs for now.

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ISHARS-RS 2K GR (IWO): ETF Research Reports
 
VIPERS-SC GRWTH (VBK): ETF Research Reports
 
SPDR-TECH SELS (XLK): ETF Research Reports
 
SPDR-HLTH CR (XLV): ETF Research Reports
 
SPDR-FINL SELS (XLF): ETF Research Reports
 
POWERSH-SP5 LVP (SPLV): ETF Research Reports
 
ISHARS-MS US MV (USMV): ETF Research Reports
 
VANGD-FTSE EUR (VGK): ETF Research Reports
 
ISHARS-JAPAN (EWJ): ETF Research Reports
 
VANGD-FTSE EM (VWO): ETF Research Reports
 
PWRSH-INDIA POR (PIN): ETF Research Reports
 
PWRSH-GL DR HA (PGJ): ETF Research Reports
 
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