Throughout 2024, equities have mainly demonstrated strong performance. They’ve inspired investors to bolster their equity exposure through a variety of ETF products. Portfolio managers, experts, and thought leaders weighed in on where equity strategies are heading during the Q4 Equity Symposium hosted by VettaFi.
Understanding Small-Caps & Value Strategies
The Federal Reserve has begun cutting interest rates. So is now the time to consider diversifying from the Magnificent Seven? If that’s true, what alternative strategies should investors be considering to capture growth and value while branching away from mega-caps?
For Mike Coyne, CFA head of small cap growth and portfolio manager at Voya Investment Management, a small-cap growth strategy might be a good move. While small-caps have underperformed thus far, Coyne highlighted that they are currently trading at attractive discounts.
However, Coyne noted that the outlook for small-caps will drastically change depending on the economic backdrop. If the United States manages to stick the soft landing, Coyne believes “overperformance starts now” for small-caps. However, if the U.S. approaches a harder landing scenario, small-cap outperformance would likely have to come longer down the line.
When it comes to choosing small-cap equities for a portfolio, Coyne prefers to seek growth first. While a small-cap value strategy can bring in strong companies, a growth strategy can provide a longer investment horizon.
“When you own small-cap stocks, you really aren’t playing them for value characteristics. You’re playing them for growth characteristics. You want those companies to become midcap and large-cap stocks over time, which creates long-term, durable value,” he added .
Meanwhile, Jim Dorment, CFA, co-head of fundamental research and portfolio manager for Voya Investment Management, broke down the benefits of larger-cap value strategies. In particular, Dorment highlighted three reasons investors should consider a value strategy right now.
First, Dorment asserted that the U.S. has entered an era of “structural inflation.” This is an era in which value and cyclical stocks can see good gains. Secondly, he observed that the current pricing of value stocks makes for a great entry point for investors.
His third reason focuses on the upcoming election season. For value stocks, Dorment sees them outperforming in the year following an election.
He noted that because of the recent upswing in market volatility, value is becoming more in favor. This is due in part to how value can offer more defensive equity exposure than a growth strategy often will.
“The market isn’t necessarily on a knife’s edge. But there are a permutation of outcomes that can happen. And we want to be well-prepared for any of those scenarios,” Dorment added.
Exploring Active Options
Heading into the last quarter of 2024, a number of macroeconomic factors are going to be in play. Those include interest rate cuts and the upcoming election. That said, is now the time to move from passive strategies into actively managed funds?
To start, Alex Zweber, CFA, CAIA, Managing Director, Investment Strategy at Parametric Portfolio Associates, highlighted key market and economic catalysts he’s watching. Along with monitoring the Fed’s policy calls, Zweber noted that rising concentration risks remain a factor to be wary of. As such, his focus is around “looking at and building more diversified strategies that will combat some of those risks of concentration.”
Rene Casis, vice president and head of portfolio solutions for American Century Investments, felt cautiously optimistic about the state of the economy. However, he noted that labor market data in particular is something he is keeping an eye on.
“We believe it’s best to position more defensively in terms of asset allocation. But we’re definitely keeping a close eye on the labor market and looking for signs of significant weakness,” Casis added.
While active fixed income strategies have done particularly well, he made the case for why active equity strategies can also work. Much like Zweber, Casis cited particular concentration concerns with the Magnificent Seven.
Given that market-cap-weighted passive strategies may be heavily tilted toward the Mag Seven, Casis argued that this creates opportunity for actively managed large-cap funds. With an active large-cap strategy, investors can gain value, diversification, and risk management that’s hard to attain with a cap-weighted approach.
As a potential investment option, Casis highlighted the American Century U.S. Quality Growth ETF (QGRO). QGRO does use an index. But Casis noted the fund’s index uses an active strategy to identify companies with good fundamentals and strong balance sheets.
Meanwhile, Zweber cited the Parametric Equity Premium Income ETF (PAPI) as an active strategy to consider. As an equity option strategy, Zweber highlighted that the fund can simultaneously deliver good income, stability, and tax efficiency.
Where Thematic ETFs Stand
So far, artificial intelligence has stood out at the dominant investment theme for the year. Will this theme persist, or will other themes emerge as new focuses?
Bo Fifer, lead portfolio manager at TCW, started by discussing where thematic ETFs can fit in an overall portfolio. According to him, these strategies can often be best used by play out long-term trends over a long period of time. Tactical thematic investments could certainly be used, but Fifer attributes that more toward a market timing strategy.
Scott Helfstein, head of investment strategy at Global X ETFs, believed that the way advisors approach thematics is shifting. Previously, he noted advisors were using thematics as a differentiator. Now, Helfstein sees thematics as a way to bolster growth in a core strategy.
“Thematics offer a way to get growth into the core by pairing three, four, or five themes people think are truly important in the economy, and diversify. Not trying to pick one or two winners within each of these themes, but diversifying across a range of companies,” he added.
Looking at the artificial intelligence theme, Fifer sees it as an opportunity to foster portfolio growth. In that regard, he highlighted the TCW Artificial Intelligence ETF (AIFD) as a potentially valuable means to access growth in artificial intelligence. To play on the AI theme, AIFD’s portfolio focuses on growth, capital appreciation, and disciplined valuation.
“Everything in our portfolio is for sale today at the right price, but we think that this theme will play out over probably a 10-year period or longer,” Fifer added.
Outside of AI, Helfstein highlighted both infrastructure and defense technology as themes worth exploring. He added that continued government spending for infrastructure, national security, along with the CHIPS Act, create steady flows of opportunity for these themes.
To gain access to a variety of infrastructure giants, investors can use the Global X US Infrastructure Development ETF (PAVE). Meanwhile, the Global X Defense Tech ETF (SHLD) can provide exposure to a number of companies engaged in aerospace and defense operations.
Looking at International Markets
While much of the focus has been on domestic equities, international strategies have risen in value. Heading into Q4, is now the time for investors to gain more exposure to developed or international markets?
To begin, Jeff Weniger, CFA, head of equity strategy for WisdomTree Asset Management, discussed the home-country bias some investors may have. The U.S. economy has dominated year after year. So Weniger wasn’t surprised to see investors remain confident in U.S. equities. However, he noted that a shift in interest rates, equity valuations, and economic fundamentals can create opportunities to branch out to international equities.
On the currency side, Weniger uses the euro as an example to highlight how it keeps settling into the similar price as it began. Therefore, investors can mitigate potential headaches by using a hedged international ETF.
Looking at Japan’s economy, he explained there are a number of catalysts that should encourage investors to stay engaged with Japan’s companies. And that’s despite hawkish concerns from the Bank of Japan. One factor Weniger is watching is the potential acquisition of 711 parent company Seven & I Holdings by Canadian convenience-store operator Alimentation Couche-Tard.
Should Japan let this acquisition close, that will “be a signal they would be truly willing to accept foreigners coming in and buying up national champions,” he noted.
Looking more broadly at Japan, Weniger remained optimistic. He projected return on equity to rise in the country through 2025 and 2026, along with profitability expanding.
Investors looking to gain direct exposure to Japan’s equity market with a hedge on currency fluctuations may find long-term value with the WisdomTree Japan Hedged Equity Fund (DXJ). Alternatively, investors can focus on diversifying hedged international growth with the WisdomTree International Hedged Quality Dividend Growth Fund (IHDG).
Big Takeaways
To close out the Q4 Equity Symposium, VettaFi moderators Todd Rosenbluth, Kirsten Chang, and Cinthia Murphy joined to discuss their personal highlights.
Murphy found it surprising that symposium polling showed how many attendees were turning to active management. Additionally, she enjoyed the thematic conversations about valuation in AI, along with the merits of infrastructure and defense as a theme.
Rosenbluth was also interested in the symposium polling, particularly in how the audience favors large-cap value. The discussion on international investing indicated “there’s not a lot to love” in Europe. Yet Rosenbluth sees the region as a potential valuation opportunity.
Chang was very interested in the rising case for active equity strategies. Active fixed income funds have been dominant. But concerns with mega-cap growth strategies are pushing more investors to pivot to active equity ETFs.
On the topic of fixed income, Rosenbluth noted that VettaFi will be hosting the Q4 Fixed Income Symposium on Oct. 24, 2024. To learn more about the upcoming symposium, click here.
To watch the full symposium and receive CE credits, register for the replay here.
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