Structure Matters: Policy, Themes, and 5% Yield | ETF Trends

Broad Market Commentary & Social Media Shares

Fixed income was all in the news last week. Arguably, the Fitch treasury downgrade and other signs of trends in credit spreads could throw a wrench into the possibility of a soft landing. Worse than that, it also seems that inflation will remain higher for longer, which could present further challenges for the 60/40 model and the Federal Reserves’s ability to manufacture economic stimulus. To say this market is reliant on momentum built off a bottom is an understatement. Even Apple, from the much anticipated earnings report looks to be giving back part of its trillions of market cap. These are paradoxical conditions for sure, and a reason for financial advisors to look even closer at non-correlated and alternative asset classes than ever before. Of course, the simple truth is that evidence of healthy capital markets would be be seen in a broadening of the equity market and boring conditions in the fixed income market. Wouldn’t it be wonderful if we just went sideways for a couple of months while conditions stabalized?

There are few certainties right now, but with higher interest rates and more U.S. debt, it remians certain that regadless of a recession, stagflation, or economic growth, the interest payments on America’s debt wil continue to rise. Those looking for KPI’s to shake confidence will find the Peter G Pertson article, which states “The Congressional Budeget Office (CBO) projects that interest payments will total $663 billion in fiscal year 2023 and rise rapidly thoughout the next decade – climbing from $745 billion 2024 to $1.4 trillion in 2023. In total, net interest payments will total nearly $10.6 trillion over the enxt decade.” See image below:

Those looking for certainties and confidence around the most forecasted recession in history will find the news that the probability did hit a high, and then pull back to below 66%. The high was 70.84%. Historically, playing such odds would lead to the purchase of TLT, but given the downgrade, this trade may not work as well. Again, there is a reason why they say past performance is not indicative of future outcomes, aka conditions are different!

The risks of a credit contraction needs to be monitored closely, which is why there should be concern that for the first time in 3 years, non-revolving credit dropped in May.[i] After all, what would it mean if credit spreads widen out on higher Treasury costs? Oh my word that would be ugly!

The mortgage refinance market has, not surprisingly, plunged to multi-decade lows, as 7% rates provide little opportunity for cost savings.[ii] This is arguably a good thing for certain consumers who are well positioned with their housing opportunity, and a bad thing for others. Regardless, here is a twist of fate irony. Unemployment, a key inflationary driver, will continue to remain low, so long as stock market prices remain high. After all, it is difficult to lay people off when your stock price is trending higher, or even near an all-time high. Think about this issue when you are hoping for a stock market rally, when interest rates remain trending higher. We can only hope that the Treasury bond market ends up being the exception to logic and math.

Hidden Gems: Measuring Performance

Hidden Gems: ETFs Worth a Second Look

While taking a second look at these funds which are currently positioned defensively and focused on Strategus’s analysis around policy and lobbying, one should wonder how Dianne Feirstein can continue her role in Congress when she has ceded power of attorney to her daughter? Thank you for your service Dianne Feirstein, but isn’t this kind of a conflicting decision, at odds with your California voters’ interest? Sorry for talking about politics here, but this was too juicy! By the way, to be clear – and with respect, somehow this 90-year-old person seems to be very active. Check out her press releases. (see link here)

Highlighting the two Strategas Asset Management Funds (SAMT and SAGP), we suggest the key thesis that drives the performance – structure matters. In times when alpha is achieved, the inflexion point will validate the structure and strategy. However, we should always remember that performance is backward-looking and not always indicative of what might work in the future. What we invest in is always about the outlook for the future and not the past. Thus, we believe that sometimes, looking under the hood to determine what has not worked recently is just as important as catching the buzz and momentum on what is working well.

In the white line is the SAGP Fund whose mandate is to identify 5 Global Macro themes. The interesting part of this ETF is the fact that its high active share strategy only has a 15% overlap to the Invesco Aerospace & Defense ETF (PPA). Note we recently also wrote about defense as a theme, so this is consistent with our overall posture (see link here).

Today, these themes are:

  • Geopolitical Risk/Global Defense Spending
  • Supply Chain/Manufacturing/Onshoring
  • Healthcare Innovation/Merger Activity
  • Corporate Tax Increases
  • A Global Allocation with a US Tilt

Noteworthy is the fact that the Strategas Macro Thematic Opportunity Fund (SAMT), by design, currently has similar minimum low overlap to funds, but clearly emphasizes high quality, low volatility, and dividends.

Real Life Tank Battle Ground Stories

Inquiry/Perspective: Financial Advisors drawn to the ETF Think Tank tend to be seeking research on alpha and risk management. Thus, when a 90-day T-bill is offering a yield of 5.44%, this presents both an opportunity to grow your book of business, and a simple place to allocate to “risk free return.”

Answer: Boring may be better these days as we are in the summer months. Most importantly, these yields are compelling prospecting tools. We know several financial advisors who have drawn big pools of capital by simply reminding people that these yields are available and an opportunity.

Speaking about prospecting tools, we want to hear from you. Please do find some time to vote on the poll regarding which kind business card you prefer to use, paper or digital (see link here).

Summary

Markets sometimes offer a gift, especially when uncertainty is high. We see cash as an asset class that yields 5% as a smart investment given these uncertain times. We remain avid believers in innovation and growth, but while looking under the hood at the Strategas funds, we are reminded that thematic investing is about where the puck may be going, which is sometimes driven (or at least influenced by) government policies.

For more news, information, and analysis, visit the ETF Strategist Channel.


[i] https://www.linkedin.com/posts/dan-weiskopf-45886111_stocks-markets-economy-activity-7088875011700072448-zM-a/?utm_source=share&utm_medium=member_desktop

[ii] https://www.linkedin.com/posts/dan-weiskopf-45886111_stocks-markets-economy-activity-7090076174902546433-MGTC?utm_source=share&utm_medium=member_desktop

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