It’s a difficult season for advisors who are still working to create optimal portfolios for their clients in a time of rising interest rates, inflation, supply chain disruptions, and more. WisdomTree Asset Management’s Jeremy Schwartz, CFA and global CIO, and Kevin Flanagan, head of fixed income strategy, joined Dave Nadig, CIO and director of research for ETF Trends, to discuss an inflation toolkit for advisors in a recent webcast.
Markets are currently dealing with the effects of “unprecedented” monetary policy, a Fed with a $9 trillion balance sheet, and surging money supply created to combat COVID-19, explains Flanagan. All of this coupled with supply chain shortages and tighter labor markets have driven inflation up to its current historic high, and advisors are largely anticipating a Fed response in 2022 that will place interest rates between 1.1%-2%, equating to five rate hikes, most likely.
“If you look at the math of it right now, if you were to get something closer to 2% by the end of this year, that means somewhere along the lines the Fed is going to have to give us a half-point increase,” says Flanagan.
WisdomTree anticipates inflation remaining sticky as it moves from being centered around goods to instead centering around services and then trickling into unemployment rates and a tight labor market. Investors looking to protect their income from inflation through TIPS are currently having to lock in negative real yields due to the historically low rates on Treasuries.
When looking for returns in times of inflation, gold has historically been the answer for investors, particularly over the long term. Schwartz explains that over longer time horizons, it has kept up with inflation and provided purchasing power, but in the short term, it is affected by a variety of factors such as the dollar, interest rates, and the siphoning power that bitcoin is having on gold.
“There’s a lot of things competing in the short run, but I do think in the long run it has an interesting place in portfolios,” Schwartz explains.
Dividends, on the other hand, have been steadily outgrowing inflation, increasing at an annual rate of 5.7% since 1957, which is more than 2% above the inflation rate. Even in the decades of the most difficult inflation, where it was persistently 6%, dividends averaged 6.5%, remaining above, discusses Schwartz. Dividend sensitivity is something that plays a major role across the stocks spectrum.
Your Inflation Toolkit From WisdomTree
WisdomTree believes that equities provide the best inflation hedge, specifically within commodities as real assets led performance in 2021. The WisdomTree Enhanced Commodity Strategy Fund (GCC) is an ETF that is actively managed and seeks to maximize expected carry, while being the first ETF to have exposure to bitcoin futures. With bitcoin being thought of as a gold alternative by younger investors, an allocation into regulated bitcoin futures (up to 5% of assets of GCC) provides a diversifying element while playing to the broader strategy.
“This is really a more broad-based commodities,” explains Schwartz of GCC. “We’re trying to get closer to equal risk contribution in the major categories of energy, agriculture, precious metals, industrials metals, and then the small, new, gold version with bitcoin futures.”
Another option is to use a managed futures strategy which can provide a multi-layered approach to diversification. The WisdomTree Managed Futures Strategy Fund (WTMF) is the first ETF to offer a managed futures strategy, is not leveraged, and has no investment minimum.
Gold has historically performed well during the worst times of S&P 500 performance; in the 20 worst quarters for the S&P 500, gold had an outperformance of 18.2% on average. Schwartz sees the potential for gold to perform more strongly if volatility continues, which it is expected to do. The WisdomTree Efficient Gold Plus Gold Miners Strategy Fund (GDMN) combines gold and gold futures with gold miners, wherein $90 of gold futures overlays $90 of equity exposure within the fund, with $10 cash collateral.
Other fixed income investing solutions that focus on rate-hedging include the WisdomTree Floating Rate Treasury Fund (USFR), which is based on the monthly Treasury two-year FRN auction, the WisdomTree Interest Rate Hedged U.S. Aggregate Bond Fund (AGZD), which takes a long position on the Agg and a short position in Treasury futures, and the WisdomTree Interest Rate Hedged High Yield Bond Fund (HYZD), which has a quality-screened long position in high-yield bonds within the U.S. while having short positions in Treasury futures.
Financial advisors who are interested in learning more about their inflation toolkit can watch the webcast here on demand.