By Mark DeCambre
Hello there! What a week it has been with investors facing renewed worries about inflation, rising Treasury yields, and a debt-ceiling fracas ( temporarily paused ) that has caused Wall Street some major agita . Add a surge in energy prices and now you’re trading in the month of October .
In any event, we’ll cover a bunch of newfangled ETFs this week and offer some insights from Gargi Chaudhuri , head of iShares investment strategy Americas at BlackRock Inc . /zigman2/quotes/207946232/composite BLK +1.02% , who is making the case that growing fears of so-called stagflation—an economic environment marked by high unemployment, high inflation, and low economic growth, experienced in the U.S. in the 1970s —are misplaced. She delivers a fairly simple ETF strategy to employ if her predictions of a reflationary environment come to pass.
The good and the bad
|Top 5 gainers of the past week||%Performance|
|Amplify Transformational Data Sharing ETF /zigman2/quotes/204122720/composite BLOK||8.0|
|United States Oil Fund LP /zigman2/quotes/203483736/composite USO||6.3|
|iShares MSCI Russia ETF||5.7|
|VanEck Oil Services ETF /zigman2/quotes/207596637/composite OIH||5.7|
|SPDR S&P Oil & Gas Exploration & Production ETF /zigman2/quotes/203527521/composite XOP||5.5|
|Source: FactSet, through Oct. 6, excluding ETNs and leveraged products . Includes NYSE, Nasdaq and Cboe traded ETFs of $500 million or greater|
|Top 5 decliners of the past week||%Performance|
|SPDR S&P Retail ETF /zigman2/quotes/206947004/composite XRT||-4.8|
|VanEck Biotech ETF /zigman2/quotes/203889705/composite BBH||-4.3|
|Global X Robotics & Artificial Intelligence ETF /zigman2/quotes/205896633/composite BOTZ||-4.0|
|iShares Currency Hedged MSCI Japan ETF /zigman2/quotes/208320118/composite HEWJ||-3.9|
|WisdomTree Japan Hedged Equity Fund /zigman2/quotes/203865992/composite DXJ||-3.9|
An environment that resembles ‘reflation’
When ETF Wrap spoke to Chaudhuri back in July, inflation was the hot theme and while that concern hasn’t abated the notion of 1970s style stagflation has started to cross the lips of some economists and analysts lately.
In her most recent research outlook, Chaudhuri says that she doesn’t subscribe to the notion that the U.S. economy will find itself in the throes of stagflation. Instead, she argues that the economic environment “resembles ‘reflation’ more than ‘stagflation.'” Here’s how she describes it:
The analyst says that U.S. economic growth is healthy. The t hird and final reading of second-quarter GDP showed that the U.S. economy grew at a 6.7% annual pace, largely in line with expectations. The researcher expects the economy to grow at 4% next year. On top of that, the data showed that a rise in consumer spending was slightly faster, at 12% and exports were raised to a 7.6% increase instead of 6.6%.
Chaudhuri says that the specter of inflation, however, isn’t going to go away but does see it “peaking close to 5% core [consumer-price index] early next year before moving lower.” Of course, that is still well above the Fed’s annual 2% target but suggests that it may be more transitory than sustained.
So what does an investor do in that environment? Chaudhuri says prepare to see inflation continue to play out through supply-chain bottlenecks, product and labor shortages and rising wages and invest accordingly.
The iShares analysts said aim for sectors that are less sensitive to rising wage costs, including technology companies, financials, consumer discretionary. Of course, the BlackRock executive highlights iShares products, including the iShares Exponential Technologies ETF /zigman2/quotes/210042148/composite XT +1.26% , the iShares U.S. Consumer Discretionary ETF /zigman2/quotes/203227168/composite IYC +1.35% , the iShares U.S. Financials ETF /zigman2/quotes/207031846/composite IYF +0.74% and the iShares U.S. Regional Banks ETF /zigman2/quotes/203731711/composite IAT +0.61% , but there are loads of other counterparts in the SPDR suite. Those include the SPDR S&P Regional Banking ETF /zigman2/quotes/200108291/composite KRE +0.70% , Technology Select Sector SPDR Fund /zigman2/quotes/207444675/composite XLK +1.60% , Consumer Discretionary Select Sector SPDR Fund /zigman2/quotes/200844504/composite XLY +2.05% and the Financial Select Sector SPDR Fund /zigman2/quotes/209660484/composite XLF +0.53% . Those funds can even be cheaper at times if that is a key consideration for you. (That said, CFRA ‘s Todd Rosenbluth is always reminding us that fees shouldn’t be the only arbiter in picking an exchange-traded product.)
Semiconductor funds also may be a good place to play shortages. She points to the popular iShares Semiconductor ETF, which has already seen some $1.5 billion in inflows this year.
If this environment is more reflationary, then Chaudhuri says that investors are better off focusing on value and quality names. She recommends that investors employ a “barbell” approach to investing, which implies buying assets that are higher risk to high-quality, safer picks but avoiding anything in the middle.
For strong value plays, Chaudhuri recommends iShares MSCI U.S.A. Value Value Factor ETF /zigman2/quotes/210105323/composite VLUE +0.75% and iShares MSCI Intl Value Factor ETF /zigman2/quotes/207598164/composite IVLU +0.26% . Vanguard Value ETF /zigman2/quotes/209486178/composite VTV +0.61% is considered by some a good value option and there are others.
Fidelity Investments kicked off a roster of four thematic ETFs that will trade on Cboe Global Markets’ /zigman2/quotes/208166986/composite CBOE +0.77% BZX Exchange: Fidelity Clean Energy ETF, Fidelity Cloud Computing ETF, Fidelity Digital Health ETF, and Fidelity Electric Vehicles and Future Transportation ETF.
Greg Friedman , Fidelity’s head of ETF management and strategy, told ETF Wrap via email that the investment manager is “seeing interest in thematic investing from a wide range of investors, particularly younger ones, as they “look for opportunities to connect their investments to their personal interests, beliefs and values.”
ETF.com notes that the funds are priced cheaper than some rival funds in the same category. They all carry and expense ratio of 0.39%, which means that the investments will cost $3.90 annually for every $1000 invested. The popular iShares Global Clean Energy ETF /zigman2/quotes/205740995/composite ICLN -0.05% carries and expense ratio of 0.42% and First Trust Cloud Computing ETF /zigman2/quotes/205187458/composite SKYY +2.09% has an expense ratio of 0.60%, for example.
Thematic ETFs are fast becoming the new hot thing as providers aim to draw new clients, with precise strategic views and values. Provider ProShares last week launched a trio of funds: the ProShares S&P Kensho Smart Factories ETF /zigman2/quotes/229933719/composite MAKX +1.44% , the ProShares Big Data Refiners ETF /zigman2/quotes/229933744/composite DAT +2.73% , and the ProShares S&P Kensho Cleantech ETF /zigman2/quotes/229933691/composite CTEX -0.80% .
There isn’t a bitcoin-backed ETF but the universe of bitcoin and blockchain-related investment vehicles is growing geometrically.