Exchange traded fund investors should consider the importance of a geopolitical framework for investing to help one better understand what these geopolitical shifts mean for investment portfolios.
In the recent webcast, Geopolitical Risk: Elections, Lockdowns, and Continual Disruptions, John Sitilides, Geopolitical Strategist, Trilogy Advisors, noted that while the U.S. election has consumed our attention, it became easy to lose sight of what’s going on around the rest of the world, which is managing its own set of crises, creating both risks and opportunities.
For example, China, a rising techno-authoritarian global power, is waging a second “Cold War” against the advanced U.S. and German-led silicon-based and industrial manufacturing sectors. The battle over 5G networks stood out, with the Trump administration seeking to limit the reach of the Chinese telecommunications giant.
Beijing is also pushing to reshape the future of next-generation tech by influencing, defining, and setting the international specifications, uniform standards, norms, and platforms for how data would flow, work, and interoperate globally. As we are still in the nascent stages of the tech boom, China has more room to catch up with Western countries. It is also investing in the global supply chain to affect standard setting.
Meanwhile, China’s aggressive moves have not made it a friend among its neighbors as it pushes boundaries and creates friction with countries like India, Taiwan, and Japan.
Russia has also continued with its efforts to destabilize western markets. President Vladimir Putin’s repeated international confrontation have pushed the U.S., NATO allies, and EU partners to respond to Russian malign operations that could trigger crises. Looking ahead, Sitilides believes the new Biden Administration could reject the Trump Administration’s withdrawal from prior nuclear arms agreements and seek Russian agreement on extending the current New START agreement. The new administration may also improve diplomatic and military-to-military communications to reduce the chance of an accidental engagement, at sea where Russian vessels constantly probe Western defense capabilities, and in multiple theaters where Russian troops or proxies are engaged in land battles.
Sitilides also warned that the world has transitioned into a period of geopolitical disorder with which we have no choice but to grapple with a great power competition between the free-market democratic systems led by the U.S. and its Western allies and a powerful techno-authoritarian Chinese system. The victor will determine the future of the international order.
Consequently, Sitilides argued that investors will have to consider how the incoming administration of President-elect Joe Biden will lay the foundation for determining whether the next phase of global leadership will be predicated upon a new freedom-based trusted alliance of the U.S. and its Western and developing allies, or China and the limited techno-authoritarian network of partners it steadily cultivates amid the ongoing volatility of the global geopolitical environment.
As investors look for opportunities and consider the ongoing risks, Lauren Goodwin, Portfolio Strategist, New York Life Investments, advised investors to focus on good investment behaviors, resilient portfolios, and proactive actions, instead of distractions.
Goodwin argued that ETFs are a valuable tool for addressing geopolitical risks as investors diversify into international waters. International exposure provides diversification benefits, especially for a U.S.-heavy portfolio. Investors can look to something like the IQ 500 International ETF (NYSEArca: IQIN). IQIN tries to reflect the performance of the IQ 500 International Index, which was developed by IndexIQ and has a live track record dating from 12/31/07. All index components are headquartered outside the U.S. and are made up of common stock. The potential universe of constituent equities is ranked and weighted according to three fundamental factors: sales, market share, and operating margins. The ETF takes a different approach, looking at key fundamental factors and weighting the portfolio based on key metrics of relative strength and market position.
Geopolitical risk can trigger currency volatility. Alternatively, ETF investors interested in foreign market exposure can also take a more neutral view on foreign currency movements through a 50% hedged/50% unhedged ETF strategy, such as the IQ 50 Percent Hedged FTSE International ETF (NYSEArca: HFXI). This fund has approximately half its currency exposure of the securities in the underlying index hedged against the U.S. dollar on a monthly basis.
Lastly, risk management is complex and multi-faceted, and an ESG approach could focus on companies facing rising challenges in the global environment. The IQ Candriam ESG International Equity ETF (IQSI), which incorporates CANDRIAM’s industry-leading ESG research and data for the first time in a cost-effective ETF wrapper, can also help investors focus on environmental, social, and governance, or ESG, factors. CANDRIAM’s proprietary ESG evaluation process includes a dedicated ESG research team, which reviews companies on environmental, social, and governance considerations, either in absolute terms or relative to their peers in each sector, focusing on the most material ESG factors.
Financial advisors who are interested in learning more about positioning in this new political environment can watch the webcast here on demand.