Hi! For this week’s ETF Wrap, I spoke to Gargi Chaudhuri, BlackRock’s Head of Investment Strategy at iShares for the Americas, about what exchange-traded funds investors might consider in a slowing economy amid concerns about high inflation.
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Investors are concerned about a slowing economy and stubbornly high inflation.
In this environment, BlackRock prefers exchange-traded funds that focus on shorter-term fixed income securities, as well as equity ETFs that invest in “quality companies with strong balance sheets and pricing power,” according to Gargi Chaudhuri, the firm’s head of iShares investment strategy for the Americas.
“Having a little bit of that defensive twist in your portfolio” will help it “perform better in a slowing economy,” she said in a phone interview. Also, “we recommend investors to opt for minimal volatility.”
For example, in an emailed note this week, Chaudhuri referenced iShares MSCI USA Min Vol Factor ETF USMV, -1.97% and iShares US Healthcare Providers ETF IHF, -1.73%, as options investors in should consider. Both funds are down nearly 11% this year based on Thursday afternoon trading and have held up better than the S&P 500’s more than 14% decline, FactSet data showed at the last check.
For fixed income ETFs, it suggested iShares 1-3 Year Treasury Bond SHY, -0.07%,
iShares Short Treasury Bond ETF SHV and iShares 1-5 Year Investment Grade Corporate Bond ETF IGSB, -0.20%.
The iShares Short Treasury Bond ETF has held the best of the three with a small 0.2% decline this year, according to FactSet data Thursday afternoon.
“Ultimately, I think the Fed will take a less aggressive stance in its policy stance than what the market is currently pricing in,” Chaudhuri said over the phone. “If that happens,” she said, “front-end interest rates are likely to go down.” That should result in higher prices for shorter-dated fixed income securities, which would benefit debt holders, particularly if you look at the one-year to three-year bonds, she said.
In her note, Chaudhuri said, “We believe investors should focus on the front end of the yield curve as the Fed begins quantitative tightening.” Allows bonds it holds to expire at maturity.
According to Chaudhuri, the Fed plans to reduce its holdings of Treasuries by about $700 billion over the next 12 months as part of its QT program. “These government bonds need to find another home, and the resulting supply pressures should push yields higher,” their note said. “A lot of that will be felt at the longer end of the curve,” she said over the phone.
In May, fixed income saw its largest monthly net inflow since June 2020, according to their note. “Short-duration funds accounted for 58% of inflows as investors continue to be drawn to high-quality fixed income to exit cash and earn carry,” wrote Chaudhuri.
Meanwhile, investors remain concerned about rising inflation.
According to Chaudhuri, the iShares 0-5 Year TIPS Bond ETF STIP, +0.04% can help investors hedge against rising inflation. “We still believe inflation can continue to surprise to the upside in the near term,” she said over the phone.
Exchange-traded funds like the iShares US ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF COMT, -0.28% and the iShares Bloomberg Roll Select Commodity Strategy ETF CMDY, +0.08% offer other ways to hedge against rising inflation, like their note indicates.
Cash: fund comparison tool
Chaudhuri wrote that inflation data will be “crucial” for the course of Fed policy, with the next CPI reading scheduled for Friday morning.
BlackRock expects the Fed to hike its benchmark rate by 50 basis points next week, Chaudhuri said over the phone. “They definitely sound very hawkish,” she said, but expects the central bank could avoid a recession by sounding “less hawkish” next year.
Meanwhile, “We remain underweight technology and industrials stocks facing liquidity concerns as higher interest rates and slower growth are likely to weigh on less quality and cyclical names,” Chaudhuri wrote.
As usual, here’s your look at the best and worst ETFs for the past week through Wednesday, according to FactSet data.
The good…
| Best Actor | %Perfomance |
|
KraneShares CSI China Internet ETF KWEB, -6.56% |
12.2 |
|
EMQQ The Emerging Markets Internet & E-Commerce ETF EMQQ, -5.12% |
7.5 |
|
WisdomTree China Ex State-Owned Enterprises Fund CXSE, -4.27% |
7.1 |
|
SPDR S&P Biotech ETF XBI, -4.00% |
6.5 |
|
iShares MSCI China ETF MCHI, -3.85% |
5.9 |
|
Source: FactSet data through Wednesday, June 8, excluding ETNs and leveraged products. Includes ETFs traded on the NYSE, Nasdaq and Cboe worth USD 500 million or more. |
…the bad
New ETFs:
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The Newday Ocean Health ETF AHOY, -1.16%,
which began trading this week, will invest in companies that fight marine pollution and other threats to marine health.
See: New World Oceans Day ETF invests in plastic containment and smarter fishing
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Putnam Investments announced on June 8 that it plans to launch fixed income and quantitative equity ETFs focused on environmental, social and governance criteria in the coming months. Funds that must first go through the regulatory process include Putnam ESG Core Bond ETF, Putnam ESG High Yield ETF, Putnam ESG Ultra Short ETF, Putnam PanAgora ESG International Equity ETF and Putnam PanAgora ESG Emerging Markets Equity ETF.
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