A lot is happening at Inside ETFs this week. A new administration taking office in Washington has many looking for guidance on where to invest, and in what. Monday’s many panels and discussions centered largely on what’s working and what’s not in investing.
Among the day’s highlights, Vanguard’s Tom Rampulla offered an in-depth glimpse into the state of active management, arguing that lack of performance and high costs have most active managers consistently underperforming benchmarks. Active management isn’t exactly dead, he says, but it’s evolving in order to survive.
That survival is expressing itself in the form of three key trends that can be easily seen in the ETF space; namely, lower-cost, actively managed passive portfolios and factor investing.
Smart-Beta Theme: Factor Investing
Factor investing specifically was the central theme of Monday’s great smart-beta debate led by Schwab’s Tony Davidow, J.P. Morgan’s Yasmin Dahya, Nasdaq’s Dave Gedeon, MSCI’s Raman Aylur Subramanian and Deutsche’s Arne Noack.
Growing in popularity and demand, factor investing via ETFs can be very effective as a way to capture excess return, but understanding how they work, how they correlate to one another, and they perform in different parts of the cycle are all crucial to getting it right.
The panel was clear: Timing factors is very difficult, if not impossible. But there are clues as to when factors are changing course. Underperformance is perhaps the easiest telltale sign that something could be changing in that factor cycle. Prices, valuations and P/E ratios all offer clues on inflexion points in these cycles.
But investors are better served by balanced exposure to several factors—often via a multifactor ETF—or by displaying long-term conviction in specific factors, and avoiding overexposure to too many factors that can offset each other in performance.
At the end of the day, as Davidow put it, factor and multifactor investing only works if it generates excess return or better risk-adjusted returns. Otherwise, it’s a lot of effort for no gain.
And is there one single factor for a Trump presidency? Subramanian offered one: value. But look for value within names that are likely to benefit from Trump’s growth plans.
Top Investment Ideas: Macro Views Diverge
On the macro side, key macro analysts seem to lack consensus on the outlook for the U.S. and global economy, and differ on where they see most opportunity for investors.
Some see U.S. economic growth ahead in an earnings-driven market that has put deflation behind it. Global growth will follow. Some see serious threats to growth in President Trump’s protectionist tone. Some are looking for a market correction due to what they say is rich valuations with very little room to run.
In a colorful panel discussion about where investment opportunities are this year, five macro experts offered their favorite investment idea for 2017, as well as their outlook for the S&P 500:
- Daniel Needham, CIO of investment management at Morningstar, likes emerging markets and Europe equities and bonds in local currency. His outlook for where the S&P 500 is headed in 2017: “I don’t know.”
- Andrew Lapthorne, head of quantitative research for Societe Generale, likes hedged Japanese equities for 2017. He is pretty bullish Japan. His outlook for the S&P 500 is for the index to end the year lower.
- Richard Bernstein, CEO and CIO of Richard Bernstein Advisors, likes the U.S. economy in general, and his top pick is small-cap U.S. equities. His outlook for the S&P 500 is for it to go higher this year.
- Robert Carey, chief marketing strategist at First Trust Advisors, likes health care, and more specifically, biotech stocks. He too is looking for the S&P 500 to continue to move higher this year.
- Dennis Gartman, editor of The Gartman Letter, said he is buying commodities. He wants to own gold and is bullish the dollar. He specifically recommends owning commodities in non-U.S. dollar terms. He is looking for the S&P 500 to end slightly higher this year.
Women In ETFs
And finally, Women In ETFs marked its fourth year, with its first Women In ETFs Service Award given to Debbie Fuhr of ETFGI for her contribution to connecting the organization with global stock exchanges. Now counting 2, 500 members worldwide, the group offered professional development ideas and insights from industry veterans Monday to a room filled to capacity with women—and some men—looking to network.
Contact Cinthia Murphy at [email protected]