These are the questions on every investor’s mind: Have markets really priced in the severity of the Fed’s campaign against inflation? How bad would a 2023 recession be — if there is one at all? Perhaps most importantly, what might investors be missing when looking at their portfolios as a volatile 2022 comes to a close? With the recent release of iShares’ 2023 Investor Guide, including thoughts from Gargi Chaudhuri, iShares’ head of investment strategy, Americas, consider these three 2023 investing hot takes and how to play them with ETFs for 2023.
How Much Fixed Income Is Enough Fixed Income?
Look around the market, and much of the conversation is still focused on when to get back into the types of securities that had dominated over the last few years. The likes of growthier tech stocks may have represented core pieces of portfolios when rates were low, but according to iShares, the investing regime has changed, and investors need to really dig into fixed income to pivot.
While a long period of low, stable rates had investors clamoring for alternatives to the 60/40 portfolio, the new regime is one of “higher rates for longer” — with restrictive rates for all of 2023. Through the end of October, a 60/40 split portfolio had returned -16.8%, according to iShares, the worst annualized performance since 1937, per its research.
As such, investors may want to let loose into fixed income, especially when a low-duration, high-quality fixed income bond can earn them over 5% coupon, the firm explained, buoying their equities.
iShares noted the iShares 1-3 Year Treasury Bond ETF (SHY) as a candidate given their strong recommendation of fixed income, but investors can also keep an eye on the Invesco Taxable Municipal Bond ETF (BAB) and the Franklin Investment Grade Corporate ETF (FLCO).
BAB tracks a taxable bond index and has outperformed the ETF Database category average over the last month, while FLCO brings active management to investment-grade corporate bonds, having added $21 million in net flows over the last month.
Be Careful Buying the Dip on Tech
Investors asking themselves when to buy the dip from the sell-offs this year implicitly ask, “When do I buy tech again?” which iShares’ investor guide suggests misses that the investment regime has shifted.
The October/November rally has seen investors come back to some big tech names with each bit of slightly less hawkish news from the Fed. That may be misguided based on iShares’ takes for 2023, which emphasize the end of the “accommodative” monetary policy of the last decade or so that helped so many tech firms grow their valuations.
The new rate regime instead may limit how much tech stocks can rebound, the report suggests. Instead, healthcare, energy, and small-caps take precedence, all accessible in a variety of notable ETFs. While iShares noted the iShares Core S&P Small-Cap ETF (IJR), investors may also want to follow other ETFs for 2023 like the health-focused Harbor Health Care ETF (MEDI), which invests actively in key healthcare names, or an equal-weighted energy ETF like the Invesco S&P 500® Equal Weight Energy ETF (RYE).
MEDI holds names like UnitedHealth Group (UNH) and Eli Lilly and Company (LLY) in its top three holdings, while RYE offers evenly spread exposure to the energy sector. MEDI has outperformed the ETF Database category average over the last month, while RYE has outperformed the FactSet Segment Average in that time, according to VettaFi.
Don’t Be Afraid to Make Inflation-Specific Plays
Inflation may drop some in the near term as supply constraints left over from 2021 loosen, but iShares anticipated that it will be some time before the Fed brings inflation to heel. Sure, shipping container costs have dropped off massively from fall 2021, but there are other notable sectors that are contributing to inflation.
One of them is shelter inflation, which comprises almost 40% of CPI, per iShares. Investors may be aware of the housing crisis, but high demand for homes and apartments is set to continue, especially as housing starts continue to fall despite that ravenous demand. Add in factors like onshoring production and geopolitical issues, and inflation still has some long-term drivers that will keep it around.
As such, the guide emphasized owning inflation-linked bonds and products like TIPS, which may now have their moment, despite years in negative territory. TIPS have borne some notable outflows so far in 2022 after $40 billion in net inflows for 2021, and may now be back in style. Investors may be skeptical based on 2022’s impact on TIPS, but iShares saw it differently.
For those investors who want to hedge for inflation with TIPS as well as infrastructure stocks that might benefit from government spending and projects, the firm notes its iShares TIPS Bond ETF (TIP) as one option. But investors shouldn’t look past the broad variety of ETFs out there that can play TIPs or infrastructure stocks that can be a little more inflation-resistant, like the Quadratic Interest Rate Volatility & Inflation Hedge ETF (IVOL) or the AGFiQ Global Infrastructure ETF (GLIF).
IVOL actively invests in a TIPS portfolio and long options based on the U.S. interest rate swap curve, charging 103 basis points and returning 2.55% over one month. GLIF, meanwhile, actively invests in a global portfolio of infrastructure-related equities and charges 45 basis points, having outperformed the ETF Database category and Factset segment averages with its one-month return of 9.05%.
Finding the right ETFs for 2023 is top of mind for investors with all sorts of investing goals and needs right now, and rightly so — there are a lot of big questions needing answers as we enter the new year. While it remains to be seen whether iShares’ takes prove to be right, or even hotter than they seem, investors can follow ETFs for 2023 like these that may be able to take advantage of these perspectives.