Inside ETFs: What are you hearing from your clients about the market? What are they worried about? And what are you telling them?
Smith: We are basically overweight investment-grade credit. We have reduced and really brought down our exposure to high yield. We have reduced and eliminated our exposure to bank loans. We have a small position in preferred stocks.
We're starting to roll up, if you will, our credit exposure, and we're starting to get more concerned about not getting paid as well as we used to get paid for some of that risk.
We think it's time for people to be perhaps a little bit more conservative, and doing so in the ETF market is pretty easy. Rolling out of the iShares iBoxx $ High Yield Corporate Bond ETF (HYG) or the SDPR Bloomberg Barclays High Yield Bond ETF (JNK) and down into the PIMCO 0-5 Year High Yield Corporate Bond Index ETF (HYS) and coming down the curve is also something we've been doing.
While we've been reducing credit risk, we've also been somewhat moderating our duration exposure and being more careful about the fact that rates may start to trend a little bit higher here, although not significantly.
Our sense is, if you're not getting paid for the risk, don't take it. In this environment, we're leaning harder on more core positions, more high-quality positions, not eliminating credit risk in totality, but preferring more investment grade as opposed to high yield.
Inside ETFs: Let’s get a bit broader here. Outside of the bond market, are there specific things keeping you up at night?
Smith: Things that keep us awake at night as risk managers, clearly, include questions like: What’s going to be the environment in regard to central bank policy?
Clearly, there's a shift that is afoot in terms of trying to eliminate the vestiges of QE on more of a predetermined and continual basis. Chairman Yellen clearly has indicated they’re going to be consolidating the balance sheet of the Fed, which has expanded dramatically over the various different QE initiatives. So how and when and to what degree that happens, that’s what we worry about at this point.