There is a lot of uncertainty in global markets today. Concerns about China persist, and continue to weigh on developed and emerging economies alike. Many question the strength of the U.S. economy after the Federal Reserve’s decision to keep rates unchanged this month. Stock returns around the globe are muted at best, and demand for safer assets is on the rise.
With that backdrop, we asked advisors the following question: What ETF(s) have you sold recently—either gotten out of completely or trimmed exposure to—and why?
Here’s what they had to say:
Clayton Fresk, portfolio manager, Stadion Money Management; Watkinsville, Georgia
We have been trimming exposures to the SPDR S&P Bank (KBE | A-71) over the past couple months. After strongly outperforming both the broad market (and broad financials) from early in the year through mid-June, KBE has sold off more than 10 percent (from June 16 through Sept. 24) as compared to -7.3 percent for the S&P 500.
The underperformance can be linked to higher interest-rate sensitivity in bank exposure. As interest rates climbed early in the year, banks outperformed. However, as we have seen, interest rates have trended lower since mid-June (outside of the front end), bank relative performance has also reversed course.
Steve Blumenthal, chairman and CEO, CMG Capital Management Group; Philadelphia
We sold the iShares iBoxx $ High Yield Corporate Bond (HYG | B-64)—and moved 100 percent of the position to the SPDR Barclays 1-3 Month T-Bill (BIL | A-62). The trend turned decidedly negative. Right now, the trend is not a friend.
Fundamentally, default risk is nearing. The high-yield space has grown from $1 trillion to $2 trillion in just five years. Too many weak companies found funding. Investors flooded money into high-yield mutual funds in a mad chase for yield. We expect defaults to rise from today’s historically low level to somewhere in the 10 percent range over the next several years.
Recession is highly probable in 2016. If we see recession, defaults will rise materially higher than 10 percent. Don’t own high-yield exposure unless you are tactically trading and risk-managing that exposure. I have traded our CMG high-yield strategy for over 20 years following the same risk management process—that process has us in cash, or BIL, today.