It may not be Ross and Rachel, but this year does have a pretty big “will they or won’t they” dynamic going between the Fed and a possible recession. Recession is one of the biggest concerns on investors’ minds this year, according to VettaFi’s advisor engagement surveys, which certainly builds the case for a recession-resistant ETF on advisors’ shortlists. One such strategy may be the Zacks Earnings Consistent Portfolio ETF (ZECP), the first ETF from Zacks Investment Management.
Speaking at the Exchange conference in Miami this week, the firm’s head of ETFs, Sal Esposito, explained how the strategy leverages Zack’s founder Len Zacks’ original earnings surprise alpha factor model to identify companies with strong track records during a recession.
“What we do is we screen names and we look for the right companies that we believe could have an earnings surprise, which can either shoot the stock up or shut stock down,” Esposito said. “You want to be in the companies that have strong balance sheets that are going to hold up and have held up in the past. That’s kind of our main selling point is that every company in this portfolio has lived through 2008. There’s a 15-year track record in order to get inside the portfolio.”
The prospect of a recession this year is one of the most debated topics right now, of course, with the Fed’s decision to raise rates further or even cut them later this year being a key factor behind a possible economic contraction. A potential recession could send stocks tumbling another 30%, according to one former Merrill Lynch economist, so the stakes are quite high.
That helps frame the case to advisors, Esposito explained, with the strategy able to shift its active style between growth and value names depending on what the managers and the quantitative screens in the ETF are seeing. ZECP looks at both forecasted and historic earnings per share (EPS) stability, with the fund rebalanced on a weekly basis.
“A lot of [advisors] are in cash right now, they’re nervous to put money to work. I think we try to talk around that and say that you may not want to be in the whole market, but you want to be in specific names that are going to have conviction throughout these turbulent times,” Esposito said. “I think that just focusing on the quality of the portfolio just eases them a bit because it can be very easy to just either sit in cash and not do anything or just invest in an index fund.”
“Realistically though, right now I don’t necessarily believe, and our firm doesn’t really believe, that just being passive is the only solution,” he added. “You have to have some kind of active component in your portfolio now because otherwise, you’re just kind of at the mercy of the market and the volatility, and no client wants to see up 5% one day down 5% the next day.”
The recession-resistant ETF consists of 58 holdings with the highest stability in their historic and forecasted EPS. Top holdings include Apple, Microsoft, United Health, Procter & Gamble, Alphabet, Home Depot, and PepsiCo. ZECP charges 55 basis points for its approach and has added $8.9 million in net inflows over the last month.
While ZECP is the first ETF from Zacks, the firm does have a robust asset management arm, Esposito said, having run mutual funds and SMAs for the last three decades. Esposito himself joined the firm from UBS last year to head up Zacks’ ETF side.
A recession-resistant ETF could be just what the doctor ordered if markets do take a big hit later this year, which remains a distinct possibility. With firms that have maintained durable earnings, ZECP and Zacks’ ETF wing overall could be worth keeping an eye on as the coming year tests its approach and Zacks’ research capabilities.