A Dynamic ETF Strategy to Keep Up with the Changing Times

Exchange traded fund investors should explore innovation across sectors to better target the opportunities of tomorrow, today.

In the recent webcast, Beyond Meme Stocks: Finding Sustainable Innovation, Matthew Bartolini, Head of SPDR Americas Research, State Street Global Advisors, helped provide an overview of the current market environment with mid- and small-cap U.S. equities outperforming in the first quarter as vaccine progress boosted investor optimism for the recovery.

Looking at the various market metrics, the sentiment shift changed factor leadership across regions in Q1, with value outperforming momentum across the world. Bartolini also pointed out that sector return dispersion remains elevated in Q1, as fund flows followed performance in favor of economic sensitive sectors, such as energy and financials, taking in the bulk of recent money inflows.

Additionally, Bartolini highlighted the ongoing strength in the equities market as supported by rising earnings expectations. Analysts are projecting the highest earnings growth since 2010, while earnings revisions remain upbeat, led by U.S. equities. Specifically, earnings expectations for energy, materials, and financials have risen. Only four sectors have EPS figures below that of where they were in 2019.

Despite the market shifts in recent months, Bartolini argued that earnings growth expectations and sentiment remain strong for innovative companies, with clean technology and smart transportation taking charge.

“Our life is being transformed at unprecedented breadth, depth, and rate of change driven by mutually reinforcing technology catalysts,” Bartolini said.

“While it is true that the long-term effects of the COVID-19 pandemic are unclear, there is likely to be an exponential increase in the demand for innovative technology,” he added.

For example, the number of connected devices per US household is expected to rise to 20 by 2025, compared to about 10 today. Global GDP is expected to increase by $15 trillion due to artificial intelligence by 2030. Biological innovations could have a direct economic impact between $2 to $4 trillion per year by 2035. About 85% of companies have accelerated digitization of employee interaction and collaboration. Around 67% of companies accelerated investment in automation and artificial intelligence.

Rising inflation concerns have weighed on the high-flying technology segment, but this is likely only a short-term blip. Zachary Hill, Global Macro Strategist, Horizon Investments, contended that innovation will continue to dampen inflationary pressures ahead as improving technologies help us do more with less. Consequently, the disinflationary forces will keep the Federal Reserve on hold for years.

Kim Arthur, Chief Executive Officer & Chief Investment Officer, Main Management, LLC, also underscored the importance of mid- and small-sized companies to help investors capture enhanced growth opportunities. While recent years have seen mid caps underperform large caps, mid caps have outperformed by 184 basis points annualized over the past 20 years.

Arthur also pointed to the ongoing focus on innovation as a means of growth. For instance, research and development spending accounts for 3.1% of the U.S. GDP. Advancements have helped costs go down across various industries such as genomic sequencing, which has helped increase output of genome sequences. Usage of mobile devices and personal computers have increased across all regions across the globe.

As a way to tap into the innovation growth opportunity, investors can look to assets like the the actively managed Main Thematic Innovation ETF (TMAT), which tries to outperform the MSCI ACWI Index in rising markets while limiting losses during periods of decline through a dynamic thematic rotation strategy.

Main Management focuses its research primarily on identifying emerging, disruptive, and innovative themes that have a large market demand, or “addressable market.” The fund rotates among the themes ranging from nascent technologies to those on the cusp of widespread adoption. It buys securities of ETFs investing in those themes. TMAT is a type of “fund of funds”, a theme-based investment strategy based on ETFs.

For example, TMAT includes a 10% tilt toward the SPDR S&P Kensho New Economies Composite ETF (NYSEArca: KOMP), which tracks the S&P Kensho New Economies Composite Index.

Financial advisors who are interested in learning more about sustainable innovations can watch the webcast here on demand.