“But the factor most heavily influenced by interest rates is a defensive one – dividend yield, which tends to underperform when rates rise, because bond yields become relatively more attractive for investors seeking income.”
To some degree this underperformance of yield is also driven by sector effects, since many dividend strategies are overweight sectors such as utilities, Nielson added.
“But the way an underlying factor portfolio is designed can help determine how it fares in a rising-rate environment, and can be driven either by construction techniques or factor selection,” Nielson said. “For example, a dividend strategy that is sector-neutral would tend to hold up relatively well when rates rise; also, screening for stocks with a positive correlation with bond yields can help protect against a potential rate headwind.”
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On the panel titled “The Case for International Equities,” advisors will hear from panelists Fran Kinniry of Vanguard, Jeremy Schwartz of WisdomTree and Michael Arone of State Street Global Advisors on opportunities in international markets. Many investors have already begun to look beyond domestic markets as lofty valuations make U.S. stocks less appealing, whereas international markets that have been relatively depressed in many years are now appearing much more attractive.
Arone told ETF Trends the case for investing in international equities is simple and compelling – that’s where the growth is.
“After a strong start to the year, European equities experienced a mid-summer setback as the rising euro stoked investor fears about the continent’s competitiveness,” Arone told ETF Trends. “However, increased equity allocations to Europe should be based on more than better valuations and a reduction in political angst. While both of these factors remain tailwinds, investors should feel confident that, in a world with very little growth, Europe is becoming a growth investment. In fact, economic growth in Europe has outpaced the US during the last 18 months. As a result, as the second quarter earnings season came to a close, Euro Stoxx 50 earnings-per-share (EPS) growth far surpassed S&P 500 EPS growth.”
According to a preliminary estimate from the Cabinet Office, Arone said Japanese gross domestic product (GDP) grew at an annualized 4 percent for the quarter ending in June.
He added that was the sixth consecutive quarter of growth and the longest unbroken streak in more than a decade.
“The underlying details of the GDP report suggest that the trend will likely continue in the third quarter,” Arone said. “As a result, Japan could end the third quarter with its longest run of quarterly growth this century. Now trading at compelling valuations compared to the US market, Japanese equities will be further supported by the tailwinds of easy monetary policy and Abenomics slowly but surely pushing corporate governance in the right direction.”
For more information and registration information for the 2017 Morningstar ETF Conference, visit www.morningstar.com.