Greetings, VettaFi Voices! In recent months, we’ve talked about a lot of different issues, from the micro to the macro, but let’s go REALLY big picture this week. With the Russia-Ukraine war still raging, China faltering, global warming wreaking havoc, geopolitical tensions rising in general and the Doomsday Clock set at the closest to total destruction that it has ever been, what do you see as the greatest threat to the global economy right now? And how can investors account for it in their portfolios?
Todd Rosenbluth, VettaFi director of research: Seriously? My son is back in school, football season has started, and I’m wearing shorts in September. And you want to talk about the greatest threats to the global economy? Deep sigh.
Heather Bell, managing editor, VettaFi: Sorry, Todd! It just seemed to make sense when I looked at the headlines this morning.
ETFs for Uncertain Times
Rosenbluth: There are lots of ETF choices for people who have fears about the global economy or the broader market.
For example, we have the lower volatility suite of ETFs — the iShares MSCI USA Min Vol Factor ETF (USMV) and the Invesco S&P 500 Low Volatility ETF (SPLV) in the U.S. and the iShares MSCI Emerging Markets Min Vol Factor ETF (EEMV) and the Invesco S&P Emerging Markets Low Volatility ETF (EELV) in emerging markets. These own the lower-risk stocks in the market and their underlying indexes rebalance regularly. SPLV’s recent rebalance boosted its weighting in consumer staples stocks.
We have the defined outcome suite of ETFs like the Innovator U.S. Equity Buffer ETF – September (BSEP) and the AllianzIM U.S. Large Cap Buffer20 Sep ETF (SEPW) that provide upside exposure up to a cap and use options to limit the downside. BlackRock even recently entered the market. There are lots of stock market scenarios your can plan for and address with these ETFs.
Meanwhile, there’s high-quality or high-dividend ETFs like the American Century U.S. Quality Growth ETF (QGRO) or the ALPS Sector Dividend Dogs ETF (SDOG) that own stocks that tend to have lower risk profiles.
While I’m on a roll here there’s lots of climate change or clean energy ETFs to consider. These include the iShares Global Clean Energy ETF (ICLN), the First Trust NASDAQ Clean Edge Green Energy Index Fund (QCLN) and the Goldman Sachs Future Planet Equity ETF (GSFP) are a few of those that come to mind.
Market volatility also is a top concern, according to VettaFi’s sentiment data. We held a webcast this week, and 58% chose this in a poll. Changing interest rates (20%) and finding steady sources of income (14%) were notably less popular in selection. Those are not doomsday scenarios, mind you.
Climate Change a Major Concern
Bell: A lot of what I’m reading says climate change is the just the biggest global threat in general, but also to the global economy. I agree with that given the damage caused by extreme weather events in recent years.
In the U.S., insurers are leaving certain states because it’s not financially viable to stay. That has to put a damper on local economies.
Closer to home for me, there was the Marshall Fire 20 minutes away from me right before New Year’s Eve 2021. It was exacerbated by dry conditions and very high winds. At least one town between Denver and Boulder was basically destroyed. The devastation took everyone by surprise – according to Wikipedia, more than 1,000 buildings burned down. Personally, I’m surprised there were only two deaths. A massive fire over the winter holidays wasn’t on anyone’s bingo card that year.
Given all that, I think an ETF that invests in companies that are not affected that much by weather events might be a good choice. Todd, do you know of anything like that? Most funds target companies that have smaller carbon footprints or that are actively fighting global warming, but what about something that invests in companies that aren’t as affected by climate change? Is there anything like that? We hear the term “recession proof” a lot, but what about “climate change proof”?
Rosenbluth: I’m not sure of climate change proof, but there are certainly active ETFs that focus on infrastructure to support the carbon transition megatrend. The Neuberger Berman Carbon Transition Infrastructure ETF (NBCT) is one that I think about. Owns Eaton, Hubbell, and NextEra Energy for example.
And of course there’s the KraneShares Global Carbon Strategy ETF (KRBN) which has made accessing the carbon futures market so much easier with the benefits of an ETF.
Devil Is in the Details
Bell: A colleague who is very passionate about this topic explained that to take an investment angle where you protect against climate change’s effects, you’ve got to dig into things like individual companies’ supply chains to see where things could be disrupted and look at climate models to see where companies are positioning themselves. They pointed out that some ESG models do incorporate “physical” climate risk but others don’t. So I have to wonder if that’s going to be something that more models adopt going forward.
Other threats I saw mentioned were the cost of living and inflation. The World Economic Forum has a report published in January that just lists global risks.
Rosenbluth: Well, SUPP is not just a ticker that reminds me I’m 47 and not my 13 year old son. The Engine No. 1 Transform Supply Chain ETF (SUPP) is an actively managed fund that invests in companies Engine No. 1 believes will drive and benefit from the “relocalization of supply chains to North America.” Most of the holdings are industrials and materials stocks like Canadian National Railway and Martin Marietta Materials.
The Tema American Reshoring ETF (RSHO) is another reshoring ETF.
Social Unrest Another Concern
Dave Nadig, VettaFi financial futurist: Late to the party here, but hoo boy, talk about a big topic! The challenge with questions like this is “for what purpose.” As in, are we talking about things folks can prepare for and personally invest alongside or are we just talking existential crises?
I think “climate change” is the correct answer here, but the where and how of the impacts is difficult to say. My very narrow, specific example of the biggest economic threat globally would actually be the broad umbrella of “social unrest” — which includes resource-conflicts (Ukraine, potentially Taiwan), but also includes the disruptive impacts of mass migrations from those conflicts, exacerbated by extreme weather events and persistent climate effects.
Rosenbluth: Thank goodness you are here, Financial Futurist! I’m using ETF ticker symbols every other sentence as this is too big for me to cover.
Nadig: It almost doesn’t matter which micro-thing you’re worried about, climate probably has an impact. Florida’s collapsing insurance market is an easy example, but it’s influencing everything from housing costs to health care.
Jen Nash, economic and market research analyst at VettaFi: This reminds me of an article I read earlier this week. The vast majority of homeowners are now considering climate disaster risks when they buy a new house, but many are still willing to accept those risks.
Difficulties of Long-Term Thinking
Nadig: I think this is the key, Jen — while “everyone” may at least grudgingly acknowledge climate change, there’s not a ton of evidence that folks are doing all that much about it. And it’s understandable — it’s far too big and complex a process for any individual to grasp completely and with all the nuance. So, most folks just keep doing what they’re doing.
Much of this has to do with the acceleration of time — it’s not a myth that things move faster now. They do — from interest rate shocks to tech developments. That makes it even harder to think long term.
Zeno Mercer, senior research analyst at VettaFi: We definitely track ESG targets on the ROBO Global side. We actually use a mix of Sustainalytics and our own “judgment,” where we talk to management teams about the potential flags if it’s on the fence or potentially misunderstood. I would say most of the companies have their own independent net-zero goals, and we’ve identified many leading examples previously.
Europe is definitely doing more from a regulatory standpoint. ROBO follows ESG policies that align more with European standards. We have technology coming down the pipeline with the potential to deflate energy costs, make crop management (indoor/outdoor) more consistent (battling against worse or more chaotic climate), and improve material composition and recyclability.
But this is all “forward looking,” and there will be growing pains to get there. Insurance companies are bailing on coastal flood/fire zones. Even Canada’s northern territories were not immune from widespread fires. (I had been mentally eying my future escape to Canada.)
The Saving Power of Technology
I may be a bit biased around the “tech can save the world” idea, but outside of regulation and controls, we still have a global “tragedy of the commons.” At this point, I think many have almost given up on the idea of preventing climate change and are on Plan B, which is Climate Mitigation+Selective Control.
Roxanna Islam Swan, VettaFi associate director of research: I think I may be echoing what everyone is saying: Climate change is real and has huge global impacts.
But I’m not sure it’s at the top of investors’ minds anymore, especially since the fascination of ESG has seemed to fade over the past few months. Plus, a lot of it will be seen several generations from now and isn’t really easy to see even in a lifetime.
I think there’s a bigger threat with global tensions and Russia. And while I don’t want to believe COVID lockdowns would happen again on a larger scale — even a lockdown somewhere like China could significantly disrupt global supply chains. Talk of new strains makes me nervous that it could happen.
Bell: Yikes, that wasn’t even on my radar really, Roxanna, but yeah, it could happen. I think I’m more concerned though about the global tensions part, though. What’s going on in Ukraine could easily spill into other parts of Europe — global food security is already being affected. And China is getting bolder about Taiwan — any escalation of conflict there could affect all of Asia and would definitely mess with global supply chains.
Rosenbluth: You all are trying to bring me down and I’m not willing to let you. So I’ll say there’s an ETF for what concerns you even global food security. Like KROP [the Global X AgTech & Food Innovation ETF].
KPOP Probably Not the Solution
Islam: At first I thought you said KPOP [the KPOP and Korean Entertainment ETF].
Nadig: Roxanna, I totally agree. I think Sino-Russian issues will remain the geopolitical crises of the decade, but many corners of it are already related. The refugees from war compete for the same scarce resource (compassion) as those fleeing famine.
I’m not suggesting that the Ukraine war is “about” climate change, but there’s little question it’s made worse for it, and certainly the interaction between Russian fossil fuel exports is in the mix.
Bell: I think climate change is so insidious and pervasive (can something be both those things?) it’s probably making every other issue we’ve discussed worse.
Rosenbluth: Roxanna, I’m sure there’s a concern to be overcome with Korean music but KROP owns Corteva, Deere, Beyond Meat, and related companies.
Bell: I know we’re nearing the end of this discussion, but are there any other positives right now? Other than KPOP?
Rosenbluth: Global growth is projected to still grow 3.0 percent in both 2023 and 2024, according to the IMF. Despite all of the concerns cited here, there is no global economic recession.
[Editor’s Note: The United Nations Framework Convention on Climate Change released what it calls a “global stocktake” on efforts to combat climate change on Friday.]