As we consider the current economic cycle, exchange traded fund investors could focus on key macro themes to better adapt to the changes ahead.
In the recent webcast, WisdomTree 2022 Outlook, Kevin Flanagan, head of fixed income strategy, highlighted the ongoing economic expansion with real GDP expected to grow 4.0% over 2022, with inflation easing to 3.3%. Meanwhile, the Fed funds rate is likely to rise to 0.40%, along with an average UST 10-year yield of 2.04%.
Flanagan noted that U.S. real GDP has already surpassed pre-pandemic levels. While the economy has rebounded, the U.S. employment market is still short of pre-pandemic levels but higher hourly wages.
WisdomTree’s Scott Welch, CIO, Model Portfolios, highlighted the WisdomTree Model Portfolio Investments as a way for financial advisors to allocate toward customized investment strategies for their clients. The WisdomTree Model Portfolio investment philosophy is global in nature; includes an ETF-only construct to optimize cost and tax efficiency; follows an “Open-Architecture” with both WisdomTree and third-party products; takes a “core/satellite” approach to optimize potential for outperformance; and do not come with strategist fees on top of ordinary expense ratios collected for fee capture.
The WisdomTree Model Portfolio line includes broad strategic, outcome-focused and collaborations across various investment styles like core equity, fixed-income, strategic multi-asset allocations, disruptive growth, and global dividend, among others.
Looking ahead, Welch noted that their strategies adhere to WisdomTree’s primary investment themes for 2022, including rising rates, improving core allocations, and the new value cycle.
“We maintain a strong preference for stocks over bonds. In equities, we remain roughly in line with the MSCI ACWI Index in terms of our regional exposures to the U.S.,
EAFE and EM,” Welch said. “Given the evolution of COVID-19 and its variants and the increasing global rate of vaccinations, we think we may see a second ‘economic reopening’ cycle, which will bode well for our allocations to value and small-cap stocks. Rising rates may provide a headwind to large-cap/growthier sectors and stocks.”
“Within fixed income, we continue to favor shorter duration and an over-weight in quality credit (emphasis on quality security selection). We see pockets of opportunity in securitized and alternative credit,” he added.
Looking at the equities markets, Jeff Weniger, head of equity strategy, warned that U.S> equity valuations are rich, but margins may still provide some leeway, especially corporations that can pass inflation to customers. He also pointed out that we can draw some hints from the 1970s when inflation was running hot and U.S. stocks with low price-to-earnings ratios outperformed.
Weniger also underscored the importance of international stocks, which appear more attractive than the overpriced U.S. markets. For example, investors looking to diversify with global exposure to consider something like the WisdomTree International Quality Dividend Growth Fund (CBOE: IQDG), which taps into that theme while providing investors with high-quality international exposure.
Additionally, the WisdomTree Emerging Markets ex-State-Owned Enterprises ETF (XSOE) is a valid consideration for exposure to developing economies. The WisdomTree Emerging Markets ex-State-Owned Enterprises Index (EMXSOE), XSOE’s underlying index, is correlated to the MSCI Emerging Markets Index, but the WisdomTree fund delivers exposure to developing economies without the burden of state-level interference, which is something that’s historically worked against investors.
Flanagan also highlighted some fixed-income strategies that emphasize rate=hedging as the Federal Reserve looks to dampen inflationary pressures by hiking interest rates in the year ahead. For fixed-income exposure, the WisdomTree Bloomberg Floating Rate Treasury Fund (NYSEArca: USFR), which debuted in February 2014, follows the Bloomberg U.S. Treasury Floating Rate Bond Index. The fund’s holdings are priced at a spread over three-month Treasury bills. As the name suggests, floating-rate notes have a floating interest rate. Specifically, the notes have a so-called reset period with interest rates tied to a benchmark, such as the Fed funds, LIBOR, prime rate, or U.S. Treasury bill rate. Due to their short reset periods, these floating rate funds have relatively low rate risk.
The WisdomTree Interest Rate Hedged U.S. Aggregate Bond Fund (NYSEARCA: AGZD) could also provide a long position representative of the Agg with a short position in Treasury futures to target zero duration. It can complement the core position of a fixed income portfolio, providing more diversification than corporate-based rate hedge solutions and Less concentration in financials.
Lastly, the WisdomTree Interest Rt Hdg Hi Yld Bd ETF (NasdaqGM: HYZD) also offers a quality-screened long position in U.S. high yield with a short position in Treasury futures to target zero duration.
Financial advisors who are interested in learning more about WisdomTree’s 2022 outlook can watch the webcast here on demand.