There is a lot of uncertainty in global markets today. Concerns about China persist, and continue to weigh on developed and emerging economies alike. Many question the strength of the U.S. economy after the Federal Reserve’s decision to keep rates unchanged this month. Stock returns around the globe are muted at best, and demand for safer assets is on the rise.
With that backdrop, we asked advisors the following question: What ETF(s) have you sold recently—either gotten out of completely or trimmed exposure to—and why?
Here’s what they had to say:
Clayton Fresk, portfolio manager, Stadion Money Management; Watkinsville, Georgia
We have been trimming exposures to the SPDR S&P Bank (KBE | A-71) over the past couple months. After strongly outperforming both the broad market (and broad financials) from early in the year through mid-June, KBE has sold off more than 10 percent (from June 16 through Sept. 24) as compared to -7.3 percent for the S&P 500.
The underperformance can be linked to higher interest-rate sensitivity in bank exposure. As interest rates climbed early in the year, banks outperformed. However, as we have seen, interest rates have trended lower since mid-June (outside of the front end), bank relative performance has also reversed course.
Steve Blumenthal, chairman and CEO, CMG Capital Management Group; Philadelphia
We sold the iShares iBoxx $ High Yield Corporate Bond (HYG | B-64)—and moved 100 percent of the position to the SPDR Barclays 1-3 Month T-Bill (BIL | A-62). The trend turned decidedly negative. Right now, the trend is not a friend.
Fundamentally, default risk is nearing. The high-yield space has grown from $1 trillion to $2 trillion in just five years. Too many weak companies found funding. Investors flooded money into high-yield mutual funds in a mad chase for yield. We expect defaults to rise from today’s historically low level to somewhere in the 10 percent range over the next several years.
Recession is highly probable in 2016. If we see recession, defaults will rise materially higher than 10 percent. Don’t own high-yield exposure unless you are tactically trading and risk-managing that exposure. I have traded our CMG high-yield strategy for over 20 years following the same risk management process—that process has us in cash, or BIL, today.
Tyler Mordy, president and CIO, Forstrong Global Asset Management; Toronto
We have actually just made big portfolio shifts. Significantly, we have sold our long-dated bond positions. Fixed income has sharply outperformed recently as equity markets have generally slumped.
Yes, the various factors that have contributed to fairly robust investment returns over the past six to seven years have fractured somewhat: Growing policy divergences amongst the world’s major central banks, slowing corporate earnings growth, slumping oil prices, as well as extreme concerns with the slowing economic growth rate of China have been some of the contributing factors unsettling investors recently.
That said, our perspectives at this time are quite different from the prevailing consensus. It’s not often that crowds are correct in their market expectations. For example, we note that investment sentiment with respect to China and emerging markets are nearly as extreme as the darkest days of the global financial crisis.
Is this warranted? We doubt it. Presently, risk in some asset sectors is at near-bargain-basement levels. As such, we’re moving away from safe assets (longer-dated bonds) and into select emerging markets.
What do we see differently? Firstly, falling energy costs are generally positive for economic growth, not negative. No economic recession in North American has ever been triggered by an oil price slump.
Secondly, investors’ memories of crashing financial markets in 2008-2009 are still quite fresh. We, too, recognize the many developments that pose economic and financial challenges over the long term. However, central banks have become much more responsive and less constrained philosophically with their actions and interventions. They’re not nearly as complacent as they were seven years ago. While it’s true that they cannot produce any real wealth, for the time being, they do have available some powerful policy options. This should not be overlooked.
Thirdly, fears of slumping emerging economies and markets are not reasonable. For example, no distinction is being made between commodity-producing and commodity-importing countries. The former are suffering, the latter are benefiting; both being tarred by the same brush. Also, economic growth, particularly in various Asian countries, is still at rates well above that of the developing world. That, coupled with low valuations, makes a compelling case.
All of the above factors suggest that a “seesaw” environment will prevail. Different opportunities will “see” in and “saw” out at varying times. A global tactical approach continues to be ideal for this environment.
Contact Cinthia Murphy at [email protected].