Siegel: 'New Normal' Investing Opportunities

December 29, 2015

ETF.com: So investors’ portfolios should reflect the actual makeup of the world market cap?

Siegel: Basically yes, but you can overweight and underweight regions. I think we might be at a time to overweight the emerging markets right now. They would probably be less than 10% on a market value basis, but 15 or 20% might be called for, for investors with a longer-term perspective that can take the short-term volatility.

ETF.com: How has dividend investing fared in 2015 compared with other years?

Siegel: This is one topic I’m going to talk about at the conference. Dividend investing has fallen a bit behind cap-weighted investing, and I believe much of the reason for that is the fear of interest rate increases. But the interest rate increases are unlikely to be that substantial in 2016, and we could definitely see outperformance of dividend-paying stocks next year.

ETF.com: I’ve seen reports that aging demographics in developed markets are going to translate into lower returns going forward. Do you think that’s likely?

Siegel: I’ve written on this issue, and I believe the biggest source of new equity buying over the next 20 or 30 years is going to come from emerging market investors. As those countries get wealthier, most of them—except for China—will have a younger demographic who are in the acquisition phase of their portfolio planning, and I expect a lot of support in the equity markets from their buying.

It’s very important not to just look at each country’s demographic and say, “Oh their stock market is going up and down because of their aging profile.” We live in a global market. It is global demand that’s going to be critical.

ETF.com: So you don’t think necessarily that an era of lower returns is likely?

Siegel: In a world where we have elevated price earnings ratios—and they’re somewhat elevated now—you will have slightly lower forward-looking real stock market returns. Historically we’ve had about 6.5% returns in stocks in the U.S. after inflation. I wouldn’t be surprised to see it fall to 5 or 6%, but that’s still a very good return.

ETF.com: In the ETF space, factor-based ETFs have been a huge trend, with multifactor ETFs really coming to the forefront this year.

Siegel: As you know, I’m a senior advisor to Wisdom Tree, and we believe in fundamental indexing, and we have quite a few products that are based on the fundamental indexing hypotheses. So I’m currently a supporter of those “smart beta” ETFs.

Now, some factors—like momentum or low volatility or quality—are relatively new, and I’m not convinced they have quite the same persistence as the value criteria that were the original factors that drove these models. But I do think what everyone is beginning to say is that the familiar capitalization-weighted indexes aren’t necessarily the best. A lot of researchers are saying, “I think I can do better.”

ETF.com: Currency hedging is another big trend in ETFs. Is that something you think investors really need to do?

Siegel: Again, Wisdom Tree is one of the leaders in currency-hedged ETFs, and our belief is that, given the interest rate structure around the world, it costs nothing to hedge currency risks between developed economies, so why take that kind of risk if you don’t have to?

We think investors will experience over time a better risk/return trade-off through taking the currency risk off the table, especially now since it costs nothing. We understand if there is a cost to removing currency risk you have to weigh the costs against the benefits, but in our current low-interest-rate environment, it doesn’t cost anything. In fact, with the Fed increasing interest rates, it will pay you to hedge the currency risks, because interest rates will be higher in the U.S.

If you can eliminate a risk and be paid for doing it, that is something I think is an attractive option for investors.

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