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The Economy Is Sputtering, so Why Invest in ETFs?

In contrast, there are nearly 17 million Americans who cannot find full-time work -- up from 10.5 million in late 2007 -- and more than 50 million working-aged Americans who have retired early, chosen to study or chosen not to work at all. There is nothing healthy about an average labor force participation rate of 63.2% for 2013. Think about it.

Last Wednesday, Janet Yellen explained the Federal Reserve has altered the way it will view "full employment" in the future. Now the Fed has greater flexibility to maintain its zero-interest-rate policy for a longer period than it originally intended -- a policy that is synonymous with emergency level stimulus for an economy that cannot stand on its own.

Would long-dated U.S. Treasury bonds in Vanguard Extended Duration (EDV) be flashing buy signals if the bond market believed that the economy merely had a rough go if it this past winter? Probably not.

By the same token, would U.S. stocks via the SPDR S&P 500 Trust (SPY) be sitting comfortably above key trendlines if investors were worried that the economy might slip into recession? Probably not.

Something is likely to give. If the bond gurus are correct, then the economy may be in danger of weakening. The sharp slowdown in home sales since mid-2013 coupled with four consecutive months of existing home sales declines suggests there may be something there.

If dip-buying stock gurus are accurate, then the economy is improving at a moderate pace -- a pace that will keep borrowing costs relatively low for at least another year or two. The upbeat manufacturing data point for March suggests that the economy is in no danger of flirting with another recession.

Investors who believe strongly in either case might best be served by heavily tilting to one side of the barbell. The near-to-immediate-term future of the economy is weak? SPY 20%/EDV 80%. The near-to-immediate term future of the economy is moderate growth? SPY 80%/EDV 20%.

For my clients, I maintain a larger-than-usual allocation to low volatility equities through funds such as  iShares USA Minimum Volatility (USMV), SPDR Select Health Care (XLV) and First Trust Technology Dividend (TDIV).

The upside may not be as remarkable as small-caps or even the S&P 500 during bullish rallies, but the drawdowns tend to be less volatile during the selloffs.

For the income side of the ledger, I have been more willing to allocate to long-term bonds such as Vanguard Long-Term Bond (BLV) and Vanguard Extended Duration (EDV) than I had been in 2012 or 2013. Not only does the yield curve continue to flatten, but the diversification is smoothing out the bumpy ride.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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