Furthermore, Schwartz underscored the opportunity in emerging markets as the EM valuation gap compared to the S&P 500 is flashing a value signal. The MSCI Emerging Markets Index was trading at a 32% discount to the S&P 500, or near levels not seen since 2003. This is significant since during 2003 through 2007, the MSCI Emerging Markets Index returned a cumulative 383%, compared to the S&P 500’s 83% return. When the valuation gap widened to this degree in previous periods, the emerging markets have historically outperformed the S&P 500 90% of the time over the following five years by an average of 14.5% annualized.
Something like the WisdomTree Emerging Markets ex-State-Owned Enterprises Fund (NYSEArca: XSOE) can help investors tap into emerging opportunities and avoid exposure to companies that are controlled by the state, which is defined as government ownership of more than 20%.
On the fixed-income side, investors who are wary of further rate hikes have a number options to hedge against further risks and still maintain income generation. For example, the WisdomTree Bloomberg Floating Rate Treasury Fund (NYSEArca: USFR), which follows the Bloomberg U.S. Treasury Floating Rate Bond Index, focuses on floating rate notes. Instead of paying a fixed rate of interest like other Treasuries, floating rate note coupon payments are based on a reference rate (90-day t-bills) plus a spread. Since 90-day bills are auctioned every week, the effective duration of floating rate notes is one week, which allows investors to capture higher rates of income as short-term rates rise. This also provides an opportunity for investors to boost income as the Federal Reserve hikes interest rates.
“Even without a rate hike, the flat/inverted yield curve offers yield without the duration risk,” Flanagan said.
For those seeking more yields but would also like a defensive tilt, investors can also look to a quality high-yield bond ETF strategy. The WisdomTree Fundamental US Short-Term High Yield Corporate Bond (NasdaqGM: SFHY) tracks the WisdomTree Fundamental U.S. Short-term High Yield Corporate Bond Index. The index is designed to capture the performance of selected issuers in the short-term U.S. non-investment-grade corporate bond market that are deemed to have favorable fundamental and income characteristics.
Financial advisors who are interested in learning more about investment strategies for the environment ahead can watch the webcast here on demand.