What To Invest In For The Rest Of 2016

July 28, 2016

This month the BlackRock Investment Institute's Midyear 2016 Global Investment Outlook was released and offered a forecast of more volatility looming for the global markets, torn between anxiety from the post-Brexit vote and the prospect of a strengthening U.S. economy. ETF.com caught up with Heidi Richardson, head of U.S. investment strategy for BlackRock’s iShares, and she offered up some actionable ideas to help investors best position their portfolios for the second half of 2016 based on the risks and themes identified by the midyear outlook.

ETF.com: Investors are looking for strategic sources of income in this low-and-keeps-getting-lower interest rate environment, despite what the Fed may or may not do. What are iShares’ thoughts on this? Is that strategic income outside the fixed -income world, such as in stock dividends?

Heidi Richardson: The overarching theme for us is that there's just going to be more volatility in the market as we move forward. You have to be much more selective in terms of the opportunity set for investors. Rather than a traditional 60/40 portfolio and just broad-based S&P 500 Index fund for your 60% [equity] and the iShares Core U.S. Aggregate Bond ETF (AGG | A-98) for your 40%[bonds], you should be really much more selective in terms of your exposure.

In this low-growth, low-return, even negative return in many parts of the world, how can you think about adding some exposure to your portfolio without taking on too much risk?

On the fixed-income side, one of the things we think that’s really attractive is municipal bonds. When we think about the risk/return trade-off with municipal bonds and then look at the tax-equivalent yields, it's quite attractive. Munis aren't sexy, but they're offering really nice returns for the given level of risk that they're taking.

On the other end of the spectrum, if I were looking at the U.S., whether it was investment -grade or high-yield, and thinking about the risk inherent in that—versus some of the opportunity set in emerging market debt—I would say you're getting compensated for the risk that you're taking for the considerable yields you're getting in emerging market debt.

I personally would rather own the iShares JP Morgan USD Emerging Markets Bond ETF (EMB | B-58), our dollar-denominated emerging market bond ETF, than own U.S. high  yield right now. And many of the companies or the countries that are issuing debt, sovereign debt, are investment-grade credit.

It's not the emerging markets from 20 years ago. A lot of these are much stabler and just higher quality in terms of the issuance of the bond. It's all about whether you’re being compensated for the risk you're taking.

On the equity side, you have to keep in mind we've got an aging population, not just here in the U.S., but globally, and even some of these other emerging markets. People need income. Dividends have been a big theme for the last few years, but you need to really be selective, even in your dividends.

There's a very large distinction, which I don't think a lot of investors realize, between dividend growers and high-dividend payers. The high-dividend payers are utilities and consumer staples, and those defensives that have really been bid up. Many of those companies have financed those dividends through debt. So, if the Fed ever raises rates, they'll be much more vulnerable.

The dividend growers have a much larger component in cyclical names and those companies that can sustainably grow their dividends year after year. As we look forward—particularly in the U.S. as valuations are getting stretched, and you're just paying more for the same level of earnings—people are going to look for those quality names and look at those companies that can continue to grow their dividends year after year.


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