So far, 2022 has brought shifting tides of market sentiment and prolonged volatility as many advisors and investors begin trying to position their portfolios for inflation and raising rate environments. For those who are continuing to follow the traditional benchmarks that have proven fruitful for the last number of years, Columbia Threadneedle Investments discusses why these broad benchmarks could ultimately expose investors to reduced returns and greater risk, and offers alternative investment strategies in a webcast moderated by Suzanne Siracuse, CEO of Suzanne Siracuse Consulting and host of the Big Reveal podcast.

Marc Zeitoun, CFA, head of strategic beta and private client advisory for Columbia Threadneedle, opens by discussing the historical use of benchmarks to give broad exposure to a market and how that has evolved over time with different approaches such as custom tilts to the benchmarks, allowing for customization of exposure.

“We’re seeing a shift now from customization to personalization,” Zeitoun discusses. “We have moved from migrating portfolios to a specific investment objective and now migrating benchmarks to objectives and personal values, so it’s the needs and the values now that are being shown in personalized solutions in the form of a direct index.”

One example of the impact of just following a benchmark can be seen when investing in emerging markets. In the MSCI EM Index, China accounts for over 30% of the index, an allocation that Zeitoun explains is significant and should be approached with discretion and intention. The company’s solution was to create the Beta Thematic Ex-China Index, which gives exposure to emerging markets excluding China, so that investors can allocate intentionally in another fund specifically to China.

The index outperformed the MSCI EM between 2015-2021 largely because of the negative impact on returns as well as the increased volatility that China had within the MSCI EM Index. The Columbia EM Core Ex-China ETF (XCEM) was launched in 2015 and was the first ETF to invest in emerging markets ex-China.

Columbia also offers ETFs based on the indexes that are constructed initially from the Russell 1000 Index and the Russell 1000 Value Index but screen out for companies that have proprietary rates of 4 (sell) and 5 (strong sell), the kinds of securities that advisors would not choose to include in their investments but that broad index investment includes exposure to. These ETFs are the Columbia Research Enhanced Core ETF (RECS) and the Columbia Research Enhanced US Value ETF (REVS), respectively.

Investing in Fixed Income Beyond Basic Benchmarks

Jay McAndrew, vice president, national sales manager for Columbia Threadneedle, speaks next about investing in bonds and the issues with just following a broad benchmark. He argues that advisors should be intentional, focused on income, find inexpensive investment opportunities, and not follow the broad indexes within bonds.

“In a lower return environment using precision tools, tools that are designed by actual portfolio managers and their insights, might be more optimal than using blunt, broad benchmarks,” McAndrew explains.

Investors’ allocations in the Bloomberg U.S. Aggregate Bond Index in the current market environment are having to increase their duration risk while experiencing reduced returns compared to what they would have seen five years ago.

Columbia Threadneedle’s solution to this issue is the Columbia Diversified Fixed Income Allocation ETF (DIAL), which invests the largest portion of assets in the highest income portion of fixed income high yield, while investing the smallest percentage into the least income-producing area of fixed income, U.S., and global Treasuries. DIAL does invest in CCC or lower-rated bonds, thereby offering investors an “actively informed passive” investment approach.

Bond investors have been flocking to short-term duration options since 2020, but Zeitoun explains that in an area of shorter duration, income matters even more and that there aren’t really products available within short duration that offer exposure to higher income-producing sectors. The Columbia Short Duration Bond ETF (SBND) gives exposure to four sectors within fixed income, offering diversification while seeking to provide income.

“Modulating volatility while preserving income can be challenging if all that you do is push the duration lever, and there is much more there from an opportunity set when you go wide,” Zeitoun says.

The firm also offers a muni ETF, the Columbia Multi-Sector Municipal Income ETF (MUST), which provides exposure to a diversity of municipal sectors including healthcare, education, electric, water, and more.

Financial advisors who are interest in learning more about investing beyond benchmarks can watch the webcast here on demand.