The market environment is changing, but investors can also adapt through exchange traded fund strategies to best position for the changes ahead.
For instance, one of the greatest risks fixed-income investors face today is the rising interest rate outlook out of the Federal Reserve as the U.S. economy continues to strengthen.
“We think the first implication is the 10-year interest rates will go to 3.5%,” Jan F. van Eck, CEO of VanEck, said at the Inside ETFs 2018 conference.
“What you actually see is that the safer your bonds, the bigger your risk because if interest rates go up by 100 basis points, Treasuries go down 6%, whereas high-yield and emerging markets – where you have a little yield cushion – basically stay flat in that environment,” van Eck said.
Consequently, van Eck argued that investors should be wary of their traditional U.S. government bond exposure and may be start branching out to other options to generate improved returns.
“We think that if the world is growing, that is not going to fall apart,” van Eck said, specifically singling out emerging market debt.
For instance, bond investors may look to something like VanEck Vectors Emerging Markets Local Currency Bond ETF (NYSEArca: EMLC), VanEck Vectors Emerging Markets High Yield Bond ETF (NYSEArca: HYEM), VanEck Vectors EM Investment Grade + BB Rated USD Sovereign Bond ETF (NYSEArca: IGEM) and VanEck Vectors Emerging Markets Aggregate Bond ETF (NYSEArca: EMAG) to diversify their fixed-income portfolio with overseas opportunities and potentially higher yield generation.
Investors who are still focused on U.S. markets will also have to become more selective in their exposures.
“One of the things that I am concerned about and talking about is valuation – being aware of what you are paying for the securities that you are putting into your portfolio,” Ed Lopez, Managing Director for VanEck, said.
Lopez suggests that investors whom are smart shoppers would look to something like the VanEck Vectors Morningstar Wide Moat ETF (NYSEArca: MOAT), which implements Morningstar’s economic moat rating to identify strong companies with wide economic moats, as a way to target some of the best valuation picks in the market with strong fundamental backing. Additionally, the VanEck Vectors Morningstar International Moat ETF (NYSEArca: MOTI), which takes a similar moat rating methodology to select overseas component holdings, can provide the same strategy for an investor’s international core position.
For more ETF-related commentary from Tom Lydon and other industry experts, visit our video category.