Using ETFs to Capitalize on Market Trends

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David Stephenson

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David Stephenson, director, ETF Strategy and Development, CIBC Asset Management.

Using ETFs to capitalize on market trends. Given the choice of ETF product offered in Canada today, there is likely a solution or exposure to meet your needs, whether you are concerned about a particular issue or want to capitalize on a market trend or theme.

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.

For example, inflation concerns continue to be top of mind for investors in 2022, and rightly so, with inflation at 30-year highs in Canada and a 40-year high in the U.S. What’s more, increasing prices and the Bank of Canada or U.S. Federal Reserve ready to raise rates could negatively impact fixed-income markets. In this environment, there are options to help investors reposition their portfolios.

For example, to name one, floating rate ETFs can provide inflation protection by holding securities with payouts linked to changes and interest rates. As well, investors can allocate to actively managed fixed-income ETFs to help navigate this environment. Go-anywhere flexible mandates have a wide opportunity set to increase yield or shorten duration as market opportunities arise. 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, for example.

A second concern for investors heading into 2022 is market valuations. Aside from more obvious choices, like holding cash, liquid alternatives or ETFs that use derivatives to protect on the downside, there are also interesting opportunities on the equity side.

One area we like is low volatility stocks that pay dividends. Low volatility strategies offer a defensive investment approach and can lower portfolio beta, volatility and enhance risk adjusted returns. 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.

Given current valuations in North America, particularly the U.S., another opportunity could be in international markets given attractive relative valuations. Emerging markets, for example, are trading at a record discount to develop markets as measured by P/E ratios back to 2005. Active international and global managers can also position portfolios in the current environment and target specific attributes like high quality with attractive risk return profiles relative to the broad market.

Finally, investors are concerned about sustainability and issues like global climate change. ESG is set to keep rising and continues to be highly topical as consumer tastes shift and investors demand more transparency. The range of ESG ETFs continues to broaden and offers investors many choices, whether they 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.

For example, clean energy is a way to benefit from the global energy transition from fossil-based fuels to renewables like wind and solar. The world is fast moving and significant events and shifts in geopolitics, global health and climate change, for example, are transitioning behaviors in financial markets at an unprecedented pace. ETFs are becoming the de facto investment vehicle to capitalize on these opportunities.

Another trend that we expect to unfold in the years ahead on the fixed-income side is the use of portfolio solutions. 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. So we expect that category to grow significantly over the next few years, as well.