Here’s a spooky thought — was the pandemic-era bounce for innovative tech and disruption-focused investments a bubble, and if so, is that bubble still haunting those sectors? Investors can’t be blamed for wondering after seeing crypto and disruptive innovation-focused investments bounce back to start the year. As such, advisors and investors may want to watch out for further speculative investing and lean on fundamentals in their ETF investments, according to new insights from Richard Bernstein Advisors (RBA).
RBA identified the five main characteristics of a financial bubble as increased liquidity, increased use of leverage, democratization of the market, increased turnover and volume, and increased new issues — and the crypto/tech outperformance in 2020–2021 fit all five, according to an earlier report by the firm.
But with the Fed draining liquidity so aggressively, and as U.S. M2 growth recently turned negative for the first time in history, investors hoping for a crypto/tech redux earlier this year may be hung out to dry. The Fed lacks the flexibility to ride to the rescue as it did during the pandemic, as the bank is tightly focused on curbing inflation.
That leaves precious little room to maneuver for speculating in a space like crypto, deemed a “bellwether of speculation” by RBA despite the super-hot 50% YTD rally for bitcoin and other cryptocurrencies. Digital assets have seen YTD performance of 35.7%, according to YCharts, while the INDXX Disruptive Technologies Index has returned 8% YTD.
RBA itself invests according to a fundamentals driven, profit cycle-focused approach. RBA’s research looks to key indicators in liquidity, sentiment, and profits to identify which sectors are set to profit from either accelerating or decelerating profits. The firm is defensively positioned right now rather than loading up on speculative investing assets most likely to fizzle out, like crypto and disruption-focused tech offerings.
Investors concerned about whether 2023’s equity rally may be impacted by speculative thinking may want to take a look at a fundamentals driven ETF strategy like the iMGP RBA Responsible Global Allocation ETF (IRBA), which charges 69 basis points for its active approach that relies on RBA’s profit cycle research. Able to go anywhere thanks to its global allocation approach, IRBA has returned 1.20% YTD.
Markets have a lot going on right now, with many investors waiting to see where the Fed goes next in its war against inflation. For investors looking for a dedicated, research-based approach rather than a rally that may be stuck in the old regime’s mindset, IRBA could be an ETF to watch.
For more news, information, and analysis, visit the Richard Bernstein Advisors Channel.