ETF.com: What’s the biggest risk in that trade?
Williams: There’s a lot of political risk, and it’s the political risk that's been discounting that market. That’s definitely been the main risk.
People realize it's been attractive for a while from a relative value standpoint, but you can't invest just based on relative value. You've got to see some recovery in fundamentals, and you're starting to get that, too.
ETF.com: What ETFs do you like for this space?
Williams: Broad with the iShares MSCI EAFE ETF (EFA), and core with the iShares Core MSCI EAFE ETF (IEFA), because it's cheaper and it's essentially the same index. We also like the eurozone iShares MSCI Eurozone ETF (EZU), which is more focused on the core eurozone excluding the U.K. That way we can carve out some of that Brexit risk.
ETF.com: In fixed income, where are the opportunities? Do you like the iShares Core U.S. Aggregate Bond ETF (AGG)?
Williams: We're an active ETF manager, and we're also an active institutional fixed manager. We've always believed you can do better than the benchmark. Just sitting in AGG is not taking advantage of your interest rate call or how you want to be on the curve or getting excess yield.
And the duration in the AGG is as high as it's been in 20 years, so you've got extra interest rate risk and you've got about a third of the yield you've gotten about a decade ago. When rates start going up, you've got more sensitivity and less yield cushion. Of anywhere to not be indexing, it's the fixed-income markets.
Going into this year, a lot of people were saying the Fed's going to get more aggressive, that rates are going to rise sharply. Shorten duration—we were not in that camp. We think rates are still going to stay low in the first half, so let's stay close to your benchmark in duration, but out-yield it with things like credit, short-duration high yield. We did that with emerging market debt earlier in the year.
There have been big dislocations after Trump was elected. Preferred stocks, for example, gave back their full year's return in about two weeks because of that spike in interest rates. We saw that as a great relative value opportunity. We stepped in and bought preferreds back in November or December of last year. That's been good. The key has been to not bank on rates spiking higher.