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June 9, 2022, 4:49 p.m. EDT

Here’s the ‘defensive twist’ BlackRock recommends for ETF investors in a slowing economy

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By Christine Idzelis

Hi! For this week’s ETF Wrap, I spoke with Gargi Chaudhuri, BlackRock’s head of iShares investment strategy for the Americas, about which exchange-traded funds investors might consider in a slowing economy amid concerns over high inflation.

Please send feedback and tips to christine.idzelis@marketwatch.com. You can also follow me on Twitter at @cidzelis .


Investors are worried about a slowing economy and stubbornly high inflation.

In this environment, BlackRock favors exchange-traded funds focused on shorter-dated fixed income, 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 “hold up better in a slowing economy,” she said in a phone interview. Also, “we are recommending that investors gravitate toward minimum volatility.”

For example, in an emailed note this week Chaudhuri pointed to the iShares MSCI USA Min Vol Factor ETF /zigman2/quotes/203326574/composite USMV -0.02% and the iShares U.S. Healthcare Providers ETF /zigman2/quotes/208016503/composite IHF +0.97% as options for investors to consider. Both funds have declined almost 11% this year based on Thursday afternoon trading, holding up better than the S&P 500’s drop of more than 14%, FactSet data show, at last check.

As for fixed-income ETFs, she suggested the iShares 1-3 Year Treasury Bond /zigman2/quotes/204549300/composite SHY -0.02% , the iShares Short Treasury Bond ETF /zigman2/quotes/204686525/composite SHV +0.01% and the iShares 1-5 Year Investment Grade Corporate Bond ETF /zigman2/quotes/204501538/composite IGSB -0.06% . The iShares Short Treasury Bond ETF has held up the best of the three, with a small decline of 0.2% this year, according to FactSet data on Thursday afternoon.

“Ultimately, I think that the Fed will take a less aggressive stance in their policy path than what is currently priced into the market, Chaudhuri said by phone. “When that happens,” she said, “front-end interest rates are likely to come down.” That should translate into higher prices for shorter-dated fixed income, benefiting holders of the debt, particularly when looking 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.” Under quantitative tightening, or QT, the Federal Reserve is reducing the size of its balance sheet by letting bonds that it holds roll off as they mature.

The Fed plans to reduce its holdings of Treasurys by about $700 billion over the next 12 months under its QT program, according to Chaudhuri. “These Treasuries will need to find a different home, and the consequent supply pressures should move yields higher,” her note says. “Much of that is going to be felt in the longer end of the curve,” she said by phone.

In May, fixed income saw the largest monthly net inflow since June 2020, according to her note. “Short duration funds made up 58% of the inflows as investors continue to gravitate to high quality fixed income as a way of stepping out of cash and earning carry,” Chaudhuri wrote.

See : Top 25 ETFs

Meanwhile, investors continue to worry about soaring inflation.

The iShares 0-5 Year TIPS Bond ETF /zigman2/quotes/203441491/composite STIP -0.12% may help investors hedge against rising inflation, according to Chaudhuri. “We still think that inflation can continue to surprise to the upside in the near term,” she said by phone.

Exchanged-traded funds such as the iShares U.S. ETF Trust iShares GSCI Commodity Dynamic Roll Strategy ETF /zigman2/quotes/208581139/composite COMT -0.33% and iShares Bloomberg Roll Select Commodity Strategy ETF /zigman2/quotes/208292249/composite CMDY -0.42% provide other ways of hedging against rising inflation, her note shows.

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