A Tilt Toward International Equity ETFs

With more volatility ahead, Astoria Advisors’ CIO shares his outlook for the rest of the year.

While the current market environment remains a mixed bag from a macro perspective, investors are slowly regaining some optimism. The Fed paused interest rate hikes in its June meeting, but we can anticipate two additional rate hikes per the Fed’s guidance.

The S&P 500, which closed at a 14-month high on Thursday, June 15, has officially surpassed the most common metric for determining a bull market, a 20% improvement from its 2022 low. As of June 27, the S&P 500 is up 13% year to date.

These positive indicators are all observed despite historically low market breadth, tightening lending standards, poor equity risk premiums, and high equity valuations as per the CAPE (Shiller PE) ratio.

Meanwhile, international exchange-traded funds are also among this year’s big winners, as European and Asian markets continue to add liquidity. Ultimately, we acknowledge a few green shoots, but wouldn’t buy equities hand-over-fist just yet.

We have chosen to increase our portfolio risk by trimming Treasuries, buying high quality corporate credit, and tilting more toward international developed equity funds, including the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG) and the SPDR Portfolio Developed World ex-US ETF (SPDW). We think most of this rally is position-related and anticipate a rougher period for risk assets in the fourth quarter. 

Easing Fears of Financial Crisis 

Hedge fund managers and others with large portfolio allocations remain bearish on S&P 500 futures, but there has been some easing from the recent lows we saw during the banking crisis. According to Bloomberg data, noncommercial futures have a -13.7% rate of open interest, signaling the beginning of a sharp reversal from the concerning 17% figure we saw earlier this year.

This is good news, as the levels we observed during 1Q and early 2Q were the lowest since the global financial crisis, and concerns about a legitimate financial turmoil have been lightened. 

Indicators of manufacturing data, economic growth, and a few other macro indicators point to a gradual economic improvement. For instance, the Philadelphia and Kansas City Fed’s Manufacturing indices both recently bottomed out in March and April and are now improving on the margin, which is what we care about as investors.

The Chicago Fed National Activity Index has also recently inflected upward, suggesting we could be entering a period of increased economic activity, and, therefore, growth.

Of course, we are still far from out of the woods. There will be repercussions of the Fed continuing to increase rates, and some are signaling a decline in the commercial real estate market.

As long as market breadth remains at historically low levels and the prevailing macro headwinds continue, it will be tough to place too much faith into the U.S. index market, priced for perfection with historically rich valuation levels.

For now, we suggest overall risk-averse portfolio positioning, with high quality large caps like the WisdomTree US Quality Dividend Growth Fund (DGRW), high quality corporate credit like the SPDR Portfolio Intermediate Term Corporate Bond ETF (SPIB), and international developed markets exposure with SPDW and IHDG) as tactical tilts that are less susceptible to the volatility we foresee.

 
Astoria Portfolio Advisors Disclosure: As of the time of this publication, Astoria owned positions in IHDG, SPDW, DRGW and SPIB on behalf of its clients. Past performance is not indicative of future performance. Any third-party websites provided on www.astoriaadvisors.com are strictly for informational purposes and for convenience. These third-party websites are publicly available and do not belong to Astoria Portfolio Advisors LLC. We do not administer the content or control it. We cannot be held liable for the accuracy, time-sensitive nature, or viability of any information shown on these sites. The material in these links is not intended to be relied upon as a forecast or investment advice by Astoria Portfolio Advisors LLC and does not constitute a recommendation, offer, or solicitation for any security or investment strategy. The appearance of such third-party material on our website does not imply our endorsement of the third-party website. We are not responsible for your use of the linked site or its content. Once you leave Astoria Portfolio Advisors LLC’s website, you will be subject to the terms of use and privacy policies of the third-party website. Refer here for more details.