As investors consider the potential flash points from the Federal Reserve’s ongoing monetary policy to the changing political climate, many are looking for ways to better manage income expectations in 2020 through targeted exchange traded fund strategies.
In the recent webcast, Income, the Fed and What to Look for in 2020, Carl Tannenbaum, Executive Vice President/Chief Economist at Northern Trust, outlined an admiring global expansion that is a decade old and provided exceptional market performance for investors. However, the bull run cannot last forever, and leading indicators are already pointing to moderating growth with recession risks rising.
For instance, the U.S.-China trade dynamic has highlighted a growing nationalist narrative that threatened global growth and pushed central banks to shift back to accommodative measures to counteract any weakness. While the U.S. and China have come to a Phase 1 agreement, the initial trade deal only rolled back some tariffs and left much undone with lingering uncertainties.
Tannenbaum pointed to other risks that have weighed on the global outlook, such as the cautionary tale with Brexit, which has yet to produce a finalized trade deal between the European Union and newly divorced United Kingdom. Investors also witnessed sporadic event risks in global hot spots like the Middle East where the U.S. and Iran came close to armed conflict.
Meanwhile, easy monetary policies around the world have helped offset risks, but some question how much further policy makers can take it before running out of options. Central banks will likely maintain their loose policies as inflationary pressures remain depressed. Tannenbaum argued that supply side factors like globalization and automation along with demand side factors like e-commerce and an aging population have contributed to the depressed inflationary pressures.
As investors try to address these issues in a still growing market outlook, Joe Tiralosi, Head of Intermediary Sales Desks, Northern Trust Asset Management, outlined a number of multi-asset portfolio ideas to help investors diversify an investment portfolio. For example, an ETF like the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF) can provide investors with a defensive position that focuses on quality dividend-providing companies that are better able to weather any storms ahead. The smart beta indexing methodology targets management efficiency or a quantitative evaluation of a firm’s deployment of capital and its financing decisions, along with a company’s profitability and cash flow, as a way to provide a better sense of a dividend-paying company’s outlook in quickly changing conditions.
For those worried about further volatility rocking the markets, investors can consider the FlexShares US Quality Low Volatility Index Fund (NYSE: QLV). QLV is not just another low-volatility strategy as the ETF utilizes a quality screen to provide exposure to high-quality companies with lower absolute risk, thereby limiting potential future volatility. The quality screen analyzes a broad universe of equities based on key indicators such as profitability, management efficiency, and cash flow, and then excludes the bottom 20% of stocks with the lowest quality score. The index is then subject to regional, sector and risk-factor constraints, in order to manage unintended style factor exposures, significant sector concentration, and high turnover.
Additionally, the FlexShares High Yield Value-Scored Bond Index Fund (NYSE: HYGV) utilizes a unique screen for high-yield corporate debt to provide investors with an attractive income-generating opportunity in a lower-for-longer yield environment. The FlexShares High Yield Value-Scored Bond Index Fund tires to reflect the performance of the Northern Trust High Yield Value-Scored US Corporate Bond Index, which hones in on value with a proprietary credit scoring model that maximizes factor inputs for value while at the same time, effectively screens for quality and liquidity risk. The bond issuers are then fundamentally evaluated against current market conditions, with low-quality issuers precluded from the index.
Financial advisors who are interested in learning more about strategies for the year ahead in 2020 can watch the webcast here on demand.