The market rotation from large- and mega-cap growth stocks and into cyclical stocks continues in the last week of July. For investors looking to keep portfolios nimble, active equity ETFs may offer an opportunity in the latter half of the year.
Market volatility, equity drawdown, geopolitical and macro risk factors; investors did not lack reasons to flee to safe-haven investments in the last two years. However, this flight to safety only served to increase concentration in major equity benchmarks. That’s according to the Global Opportunity team at Morgan Stanley Investment Management in a recent blog.
“For active managers of concentrated portfolios, this has been a difficult market to navigate,” explained the team. This is largely because “benchmark performance is increasingly driven by a select few names.”
In the last two years, the top 15 securities in the MSCI ACWI Index grew from 20% to 26.5% weight. This concentration was driven largely by investors chasing two key trends — generative AI and weight loss drugs.
Such concentration creates risk, for should these big names stumble, broad benchmarks would feel the squeeze. In the period between 07/16/24 and 07/25/24, the S&P 500 dropped 4.73%. Meanwhile, the Nasdaq-100 Index fell 6.56% over the same period.
The authors note that “this concentration amplification effect may work similarly on the way down as on the way up. The same theme that adds trillions in market value may be first to lose a comparable amount!”
The second quarter earnings season also remains a mixed bag, with major tech earnings due this week. A common theme threaded throughout many earnings reports this time is that of caution regarding declining consumer spending looking ahead. This could prove challenging to growth stocks with their heavier reliance on forward-looking estimates.
Active Equity Investing With Morgan Stanley
“While today’s increased market concentration can be challenging for investors to navigate, it also creates opportunities for active managers to uncover strong companies outside the largest names,” the authors wrote.
The Parametric Equity Premium Income ETF (PAPI) offers the dual benefit of active management alongside reliable equity income across market environments. PAPI seeks consistent monthly income as well as capital appreciation. The strategy does so by investing in an actively managed portfolio of dividend-paying equities chosen from the Russell 3000. It uses top-down, systematic analysis to select quality companies.
Companies included demonstrate 12 months of high current income and reduced risk within their sectors. The quality equity portfolio is also diversified across sectors, with sectors equally weighted.
The Calvert US Select Equity ETF (CVSE) is another actively managed fund to consider. CVSE offers exposure to large-cap stocks Calvert believes are the leaders of “financially material” ESG factors. These include both leaders as well as those companies offering notable improvement.
The fund relies on Calvert’s proprietary research to identify companies working to address critical sustainability issues. The strategy utilizes both a quantitative and qualitative approach to stock selection. The managers also weight the portfolio in a manner that seeks to reduce factor risks relative to the Russell 1000 Index. This includes a reduced portfolio carbon footprint of less than the reference Index as well as companies of greater diversity at the board level. CVSE has an expense ratio of 0.29%.
For more news, information, and analysis visit The ETF Yield Channel.