As investors shift around their portfolios in anticipation for what’s ahead, State Street Global Advisors offers some big exchange traded fund themes to better manage risk and potentially enhance returns.
ETF Trends publisher Tom Lydon spoke with Mike Arone, Managing Director and Chief Investment Strategist at State Street Global Advisors, at the Inside ETFs conference that ran Jan. 22-25, 2017 to talk three things that investors and advisors should consider in the current market.
“In today’s environment, there are three themes that we’ve been working on with financial advisors,” Arone said. “First for portfolios, consider income at a reasonable risk. Second, begin to position portfolios for more reflationary environment. And third, we expect bouts of volatility in 2017, so make sure your portfolio is protected a little bit from those bouts of volatility.”
While many expect interest rates to go up in this expansionary economic environment, State Street believes there is a limit to how high it can go, so investors should manage their portfolios accordingly.
“For example, one of the things that we see is folks have had an exposure to high yield,” Arone said. “One of the things we’re suggesting for them to do is begin to think about bank loans.”
The actively managed SPDR Blackstone/GSO Senior Loan ETF (NYSEArca: SRLN) provides exposure to senior secured floating rate bank loans.
A senior loan is a private loan taken from an underwriting bank or a syndicate of lenders. The loans are secured in that they are backed by the borrowers’ assets, which act as collateral. If the borrower defaults, lenders have a senior claim on the defaulters’ assets. Moreover, senior secured floating-rate loans have, as their name suggests, a floating interest rate component, which fluctuates with market rates.
“With that, you essentially move up the capital structure, you get access to a floating rate mechanism through the resets and you still get a competitive yield,” Arone said. “That’s income at a reasonable risk.”
The expansionary economy will also come with rising inflation, and investors will have to adapt by focusing on real assets to hedge the risk.
“One of the things that we’re suggesting for advisors is to begin to think about a diversified portfolio real assets,” Arone said. “Things like TIPS. Things like real estate. Things like global natural resource stocks and commodities.”
For instance, the SPDR Barclays TIPS ETF (NYSEArca: IPE) provides broad exposure to Treasury inflation protected securities that automatically adjusts to inflation.
The SPDR S&P Global Natural Resources ETF (NYSEArca: GNR) and SPDR S&P North American Natural Resources ETF (NYSEArca: NANR) provide exposure to industries in energy, materials or agriculture that help consumers access the world’s resources.
Additionally, even though we are in an expansionary environment, there may be bumps along the way, and investors should have a game plan to hedge the potential volatility.
“Gold is our view in terms of how you want to manage volatility in a portfolio, so it’s one of those things that has a very low correlation to stocks and bonds, and should we get those bouts of volatility, investing in gold should be helpful in protecting a portfolio,” Arone added.
Investors can gain exposure to gold through physically backed commodity ETFs, like the SPDR Gold Shares (NYSEArca: GLD) and more recently launched SPDR Long Dollar Gold Trust (NYSEArca: GLDW), which tries to hedge currency risks associated with a strengthening U.S. dollar.