As we consider the path to potential recovery, exchange traded fund investors should consider a diversified asset allocation strategy for 2021.
In the recent webcast, Turn the Page – Asset Allocation in 2021, Dan Phillips, Director Asset Allocation Strategy, Northern Trust Asset Management, pointed out that the economy is rebounding, with business activity picking up and select regional Manufacturing PMI Survey Index levels at or above pre-coronavirus levels. Supporting the rebound, aggressive monetary policy measures have been highly effective in providing the necessary liquidity to lift growth. Nevertheless, global inflation remains below the 2% target in many major economies.
Meanwhile, Phillips argued that the Covid-19 vaccine rollout may provide timely aid as coronavirus cases see a resurgence in both developed and emerging countries.
Taking stock of political election results and market trends, we see that the equity market average annual returns tend to be higher under a Democratic party executive leadership, regardless of Congress majority. However, it should be noted that average annual returns have historically been lower when the Democratic party had full Congress support.
Tax hikes under a Democratic majority have been a concern for market observers, but Phillips pointed out that when tax rates on long-term gains were raised to anything under 30%, the S&P 500 continued to produce positive returns in the six-months after the new tax-rate effective date. Historical data has shown that the S&P 500 retreated after the tax date increased above 30%.
Looking at the current markets, Phillips showed that most global markets are trading above pre-coronavirus valuations, with the U.S. equity market exhibiting some of the priciest valuations at above 20x forward price-to-earnings and the emerging markets showing some of the cheapest rates among global markets.
As part of a diversified investment portfolio, Northern Trust’s currently holds a tactical moderately overweight positioning in high-yield bonds as part of their risk-asset exposure. For example, fixed-income investors may be considering ways to enhance their yield opportunity through bond ETFs like the FlexShares High Yield Value-Scored Bond Index Fund (NYSE: HYGV).
Michael Natale, Head of Intermediary Distribution, Northern Trust Asset Management, argued that the FlexShares High Yield Value-Scored Bond Index Fund provides additional diversification benefits in multi-asset class portfolios through increased exposure to credit premia. The fund offers the potential for capital appreciation by identifying and investing in securities trading below their intrinsic value. Finally, HYGV seeks to generate higher levels of income compared to legacy indices due to targeted exposure to Northern Trust’s value factor and strategy construction.
Financial advisors who are interested in learning more about high-yield strategies can watch the webcast here on demand.