If the economic trend continues, we expect new quarterly inflation data to continue to be above the past quarter’s data. Based on our higher expectations for inflation, we believe TIPS will outperform nominal U.S. Treasury bonds of similar duration. Bank loans also look attractive in a scenario where credit risk is dropping because of good economic growth and increasing yields. In these bond segments, some holdings include:
- iShares TIPS Bond ETF (TIP)
- PowerShares Senior Loan Portfolio (BKLN)
- PIMCO 1-5 Year U.S. TIPS Index ETF (STPZ)
The financial crisis has provided the dominant market narrative for investment results since 2007. Any narrative that lasts that long begins to creep into capitalization-weighted indexes.
With a new narrative of economic populism usurping the financial crisis as the defining trend in global economics, investors should expect shifts in leadership around the world.
If this trend-shift proves to be lasting, cap-weighted indexes will be overexposed to the beneficiaries of recent years and underexposed to value stocks, especially financial stocks. Smart-beta alternatives seem more likely than normal to outperform during a period of rapid change.
Here is a sample of smart-beta ETFs, excluding the value ETFs mentioned above:
- iShares Edge MSCI USA Momentum Factor ETF (MTUM)
- J.P. Morgan Diversified Return International Equity ETF (JPIN)
- Guggenheim S&P 500 Equal Weight ETF (RSP)
At the time of this writing, CLS Investments invests in all of the securities mentioned above for its clients. CLS Investments is a third-party investment manager and ETF strategist. It began to emphasize ETFs in individual investor portfolios in 2002, and is now one of the largest active money managers using ETFs. Contact CLS' Chief Strategist Scott Kubie, CFA, at 402-896-7406 or at [email protected]. Please click here for a complete list of relevant disclosures and definitions.