ETF Strategies for Higher-for-Longer Inflation

The managing partner at Vardhan Wealth Management talks fixed income and inflation.

[This article is part of a new series from etf.com highlighting financial advisors.] 

Monish Verma is managing partner at Vardhan Wealth Management, a Summit Financial firm. etf.com's Kent Thune talked with him about exchange-traded fund strategies and ideas for investing in an environment of persistent inflation even after the Fed ends its hiking cycle. 

etf.com: How do you use ETFs in your investment tactics and portfolio strategies? 

Monish Verma: ETFs are great fund vehicles and offer a lot of inherent advantages relative to mutual funds; specifically, lower expenses, greater tax efficiency and greater accessibility across clients.  

Historically, passive ETFs have been a key component to our core, strategic “beta” allocation to markets, as they offer fee and tax-efficient exposure. Recent regulatory changes have also paved the way for an explosion in fund launches in the active ETF space, which we are keeping a close eye on.  

etf.com: Inflation is cooling, although it’s still at elevated levels. What’s your outlook for fixed income in the second half of 2023 to early 2024, and how are you incorporating these ideas into your portfolio strategies? 

Verma: We’ve entered a new regime largely characterized by structurally higher inflation. While we acknowledge the challenge in predicting inflation and anticipate continued volatility, we’re incorporating an inflationary lens through all new and existing portfolio allocations.  

Over the past few years, we’ve introduced several core components to the portfolio—such as commercial real estate—that have embedded inflationary hedge characteristics.  

For fixed income, we’ve become incrementally more positive on the asset class as income levels have risen meaningfully, and we believe much of the pain on duration has already been experienced.  

We’ve been maintaining allocations on the short end mostly in high quality, but will look to opportunistically extend duration over time as we’re nearing the end of this hiking schedule, and duration could serve as an important diversifier in a potential downturn. We also seek to tactically take advantage of fixed income credit opportunities as they present themselves.  

etf.com: Nasdaq recently announced a rebalance of the Nasdaq-100. Are you doing any rebalancing among asset classes or sector rotation of your own? 

Verma: We do make tactical allocations to sectors we find most favorable with ETFs, but we aren’t making any specific adjustments because of the rebalance.  

etf.com: Taking the rebalancing idea further, what do you think about equal-weight ETFs? Could a more balanced approach be prudent in the second half of 2023? 

Verma: Historically, market leadership and concentration has been cyclical in nature. At the same time, there are some incredible businesses that have dominated market leadership over the past several years that investors might not want to underweight to that degree. We have evaluated equal-weighted exposure but aren’t large users of those strategies at this point in time.  

etf.com: Shifting to the long term, what are some of your go-to ETFs for a period of at least five years and beyond, and why? 

Verma: We tend to be more strategic and long-term-focused so many of our larger ETF allocations are oriented towards broadly diversified, low-cost strategies. 

Disclaimer: The views and opinions contained within are solely those of the author, and do not necessarily reflect those of Summit Financial, LLC, or its affiliates. This material is being provided for informational purposes only and is not a solicitation or an offer to buy any security or instrument or to participate in any planning or trading strategy. Any strategies and/or investments referenced may not be appropriate for all investors as the appropriateness of a particular investment or strategy will depend on an investor's individual circumstances and objectives.