Using ETFs to capitalize on market trends

While markets remain volatile in response to inflation and high valuations, ETFs may be able to offer a number of tactical solutions.

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“The flexibility of the ETF wrapper and tradeability allows investors to adjust portfolios tactically to market developments or build out core strategic portfolios for the long term,” said David Stephenson, director of ETF strategy and development at CIBC Asset Management. 

Inflation remains a top concern for investors, with consumer prices in Canada the U.S. rising at the fastest rate in decades. Plus, the Bank of Canada and U.S. Federal Reserve raising rates could negatively impact fixed income markets.

Floating-rate ETFs can provide inflation protection by holding securities with payouts linked to changes in interest rates, Stephenson said, while actively managed fixed income ETFs can also help navigate this environment.

“Go-anywhere, flexible mandates have a wide opportunity set to increase yield or shorten duration as market opportunities arise,” he said. “The goal is to be responsive to opportunities as the cycle unfolds, whether that is in U.S. high yield, emerging market debt or even investment-grade corporate credit.”

Another trend Stephenson expects will grow in the coming years is portfolio solutions for fixed income.

“Much like asset allocation ETFs have grown significantly over the last few years, exclusive fixed income portfolios can also be used by investors to navigate the current fixed income markets,” he said.

Valuations are another concern that ETFs can address. While Stephenson pointed to strategies such as holding cash or liquid alternative ETFs that use derivatives to protect on the downside, he likes low-volatility products. 

“The combination of low volatility and dividends can provide investors with a yield premium to the broader market with lower volatility and better downside protection — so a smoother investment ride, if you will,” said Stephenson.  

He also pointed to investors’ growing concern about sustainability. Whether investors want a broad-based exposure that screens for positive ESG attributes, a portfolio solution, or a more thematic exposure to benefit from long-term trends, “the range of ESG ETFs continues to broaden and offers investors many choices,” he said.

For example, clean energy is a way to benefit from the global energy transition from fossil fuels to renewables like wind and solar, and Stephenson said ETFs can help investors capitalize on this opportunity. 

This article is part of the AdvisorToGo program, powered by CIBC. It was written without input from the sponsor.

Maddie Johnson

Maddie is a freelance writer and editor who has been reporting for Advisor.ca since 2019.