ETF Ideas for the Markets Ahead | ETF Trends

As we consider the global economic outlook, the impact of fiscal and monetary policy will have on markets ahead, investors should prep their exchange traded fund investment portfolios for 2023.

In the recent webcast, Preparing Your Portfolio For 2023, Simona Mocuta, chief economist at State Street Global Advisors, outlined the next stage of the macroeconomic story, which could include materially sub-trend growth, disinflationary conditions ahead, the consequences of the Federal Reserve’s monetary policy tightening, and normalizing labor markets.

Looking ahead, Mocuta argued that after the dust settles from the current problems we are facing today, the U.S. economy could begin to slow down, with GDP growth projected to be its slowest since 2001. Specifically, SSGA projected that real GDP growth could be 1.5% for 2022, but the U.S. economy might only expand 0.4% in 2023.

Mocuta highlighted some economic signals that are already showing a slowdown. For example, consumer consumption is plateauing and personal savings rates are already at record lows, which suggests that Americans won’t be binging on consumption anytime soon. Meanwhile, the strangled supply chains are unwinding, with manufacturing backlogs decreasing and shipping costs collapsing. Consequently, she argued that we could be facing a disinflationary episode ahead due to the normalizing supply chains and lowering demand.

Matthew Bartolini, head of SPDR Americas Research at State Street Global Advisors, noted that while earnings revisions stabilized, growth estimates continue their downward trend, except for US small caps. While monetary policies continue driving market sentiment, investors have punished earnings misses and rewarded earnings beats more than usual. He added that price impacts have been greater than historical averages in October, indicating investors have become more fundamental focused, and earnings surprises have steadily declined over the past few quarters to their lowest since Q2 2020.

Investors can target the potential strength in the small-cap segment through something like the SPDR Portfolio S&P 600 Small Cap ETF (SPSM).

In the current market environment, Bartolini pointed out that dividend stocks have historically done well in periods of elevated inflation.

Investors have found refuge in dividend-themed ETF strategies to ride out market volatility, such as the SPDR S&P Dividend ETF (SDY) and the SPDR Portfolio S&P 500 High Dividend (SPYD).

Furthermore, looking at S&P 500 market sectors, the energy sector has shown strong price momentum and earnings sentiment with reasonable valuations. While Tech screens as attractive, the discarded Semiconductor industry may present a value opportunity, according to Bartolini.

Investors can use the SPDR S&P Semiconductor ETF (XSD) to take a focused play on the semiconductor subsector.

For the fixed-income markets, David Blair, managing director and portfolio manager at Nuveen Asset Management, argued that interest rates will rise and likely peak this year, so investors should expect further yield increases, and the curve should stay relatively flat.

In this type of market environment, Blair believed investors should take a look at the municipal bond market. Municipal fund flows have historically returned after market dislocations. We have witnessed record inflows in 2021, which have been dwarfed by the outflows in 2022.

Fundamentals may also support the munis market. Blair said municipal supply is lower than last year, as rising rates have dampened refundings. Lower refunding activity has led to less taxable issuance this year.

Risk is also abating in the munis segment. Ratings upgrades have continued to exceed downgrades in recent history. In 2022, credit rating upgrades are exceeding downgrades by approximately 4 to 1.

Yield hunters can also turn to municipal bonds to help diversify their fixed-income portfolios, such as the SPDR Nuveen Municipal Bond ETF (MBND) and the SPDR Nuveen Municipal Bond ESG ETF (MBNE).

Financial advisors who are interested in learning more about investment ideas for 2023 can watch the webcast here on demand.