Editor’s Note: This article is part of InvestorPlace.com’s Best ETFs for 2019 contest. Kent Thune’s pick for the contest is the SPDR Gold Shares (NYSEARCA:GLD).

Picking the best ETFs for 2019 will likely be one of the most challenging investment decisions of the past decade.

Perhaps the most important point to make about investing in 2019, or for almost any period of time, is that allocating all of your assets to just one fund can be a performance-crushing mistake. It can also be a mistake to choose investments on a calendar year basis. Market and economic cycles are difficult to predict and can last for several years.

When making decisions about buying ETFs, especially for a short period of time, it’s wise to factor in the current market and economic conditions, look past media noise, and arrive at an overriding narrative for that period of time. That narrative for 2019 appears to be a slowing economy and volatile market with eroding consumer confidence.

With that said, here are factors to consider for 2019 and how they may impact your investment decisions:

• Interest Rates: Although the Federal Reserve has signaled that it may pause in its tightening campaign, the majority of market analysts and economic experts expect up to three more rate hikes in 2019. The market won’t react positively to higher rates or a pause. Higher rates erode at corporate profits and slow the housing market by increasing borrowing costs. A pause in rate hikes may raise concern over a slowing economy later in 2019 or even recession in 2020.
• Recession/Bear Market Watch: With higher rates, weak world economies and no monetary or fiscal stimulus coming, investors won’t see much reason to stay in risk-on mode. The current trend of short-term rates rising and long-term rates falling point to increasing possibility of an inverted yield curve, which has accurately predicted the last three recessions.
• Tariffs: Short-term volatility is being driven largely by the outlook for trade disputes between the U.S. and China. As the duration of the tariff war increases, the negative impact on the economy increases.
• Consumer Sentiment: Since two-thirds of the U.S. economy consists of consumer activity, the so-called wealth effect, which derives from the value of equity portfolios and home prices, could begin to level off or diminish in 2019. It’s difficult to imagine the collective consumer mood getting better as 401(k) balances and home values stop growing or begin declining.

In 2019, investors will likely continue their shift out of riskier assets and sectors, such as technology and small-cap stocks, and into defensive areas, such as healthcare, utilities and consumer staples. Although nearly impossible to forecast one year in advance, a weakening economy or perhaps a mild recession appears almost certain by late 2019 or early 2020.

Since the market is a forward-looking mechanism, 2019 could eke out some gains for stocks amidst more volatility, especially in the first two quarters. But the second half of 2019 could see a larger shift toward defensive areas and safe havens, such as precious metals, with declines in stocks.

Although this scenario may play out sooner or later than the second half of 2019, it’s certainly wise to begin or continue building on defensive areas in your portfolio. A solid portfolio for 2019, depending upon several factors including the investor’s time horizon and risk tolerance, might include an S&P 500 Index core holding, such as iShares Core S&P 500 Index (NYSEARCA:IVV), a bond core holding, such as iShares Core Aggregate Bond (NYSEARCA:IVV), and several satellite holdings that might include defensive sector ETFs, such as Health Care Select Sector SPDR (NYSEARCA:XLV), Utilities Select Sector SPDR (NYSEARCA:XLU) and Consumer Select Sector SPDR (NYSEARCA:XLP).

Why GLD Is One of the Best ETFs to Buy for 2019

Rounding out the satellite holdings in a well-diversified portfolio for 2019, a widely traded, highly liquid gold ETF like SPDR Gold Shares (NYSEARCA:GLD) is a smart choice.

Gold funds, particularly GLD, look to be especially smart choices in 2019 for a few reasons:

• Tariffs and the U.S. Dollar: Political and economic pressures will likely press U.S. President Donald Trump and China’s Xi Jinping to arrive at some type of trade agreement that will place new downside pressure on the U.S. dollar and make gold a better safe haven.
• Interest Rates: Gold prices generally move in the opposite direction from interest rates. However, gold can still move higher in a rising rate environment, especially in the late phase of the business cycle, as we are arguably in now. Furthermore, if the Fed decides to pause its rate hike campaign and we get less than the currently expected three increases, gold will jump higher.
• Economic/Market Uncertainty: The worst enemy of the equity investor is uncertainty, which leads to volatility and downside pressure. As uncertainty increases, so does the demand for perceived safety, which often leads to higher demand (and prices) for gold.
• ‘Smart Money’ Indicator: Commercial hedgers are often considered to be “smart money” and they are nearly net short now, which indicates gold is at or near a bottom. This adds to the narrative that GLD will, at a minimum, hold its value or, at best, rise significantly from late December 2018 to the early parts of 2020.

If the GLD ETF isn’t a top performer in 2019, investors looking to get more defensive in anticipation of a slower economy and potential for recession into 2020 are wise to add or increase their gold exposure up to the 5%-10% allocation range now.

As of this writing, Kent Thune did not personally hold a position in any of the aforementioned securities. However, he holds IVV, AGG, XLV, XLU and GLD in some client accounts. Under no circumstances does this information represent a recommendation to buy or sell securities.