Daniel Prince, Head of iShares U.S. Wealth Advisory Product Consulting, discusses the tax efficiency of ETFs and why tax costs shouldn’t be overlooked in investing. Nate & Conor also provide insight into the potential tax savings ETFs can provide and explain why actively managed mutual funds are at a disadvantage.
Michael Natale, Head of Intermediary Distribution at Northern Trust, discusses growing investor concern over rising inflation and spotlights several FlexShares ETFs that could potentially serve as inflation hedges in a portfolio. Nate & Conor recap financial market performance in the first quarter of 2018.
Nathan Geraci is President of The ETF Store, Inc. and host of “The ETF Store Show“.
A key theme in the stock market last year was a lack of volatility. For the first time ever, stocks were positive in all twelve calendar months and experienced only eight days with up or down moves exceeding 1%, one of the least volatile years on record. 2018 began on a similar note, with stocks racing out of the gate and volatility nonexistent. The environment shifted abruptly in early February as stocks plummeted 10%+ with a historic spike in volatility. Since then, the ride has been a bumpy one for investors: through the end of March, the S&P 500 has already seen twenty-three moves of at least 1%. Stocks experienced their first quarterly decline since the third quarter of 2015.
The rising volatility has been attributed to any number of factors including rising interest rates, fear of inflation, the unwinding of the Fed’s balance sheet, potential trade wars, tech stocks plunging on concerns over data privacy and government regulation, and continued political turmoil in Washington D.C. Additionally, though corporate earnings remain strong, there is evidence that the magnitude of improvement has slowed.
Making investors even more uncomfortable has been the lack of refuge typically provided by bonds, which experienced declines across the board during the first quarter. Interest rates and bond prices move in opposite directions. As rates rise, bond prices fall – both of which have occurred thus far in 2018. Investors typically view bonds as a safe haven, providing cushion when stocks decline. However, an environment of rising rates and growing inflation concerns can create a short-term headwind for both stocks and bonds. The bottom line is it seems change is in the air. Stock market uncertainty and volatility is back with a vengeance and rising rates and inflation are a growing concern for bond investors.
“The more things change, the more they stay the same.” – Alphonse Karr
There are three important takeaways for investors:
1) The stock market environment is changing, but it’s changing back to normal. The lack of volatility experienced in 2017 was far from normal. According to CFRA’s Sam Stovall, the average number of 1% up or down days for the S&P 500 is fifty-one. 2017 had eight! We mentioned last quarter that volatility is a normal part of investing in stocks and, as an investor, you should be mentally and financially prepared for it. The stock market is simply getting back to its usual self – where volatility actually exists. More importantly, remember that while volatility is often equated to risk, the real risk for investors is unnecessarily avoiding the stock market and falling short of financial goals.
2) The bond market – changing back to normal as well! After years of declines, interest rates are back on the rise – trending towards more normalized levels. The bond market has experienced mostly falling rates (and thus rising prices) over the past 35+ years, which has resulted in an extended bull market for bond investors. A meaningful, longer-term uptick in rates would certainly be a new experience for many investors, but one that would move rates closer to their historical average.
While rising rates may cause some short-term pain for bonds, they can be beneficial over the long-run. Rising rates can equate to greater income for yield-starved investors, and the growing income from higher yields ultimately may trump short-term capital losses. Also, there is no shortage of fixed income holdings that may react well to rising rates and inflation, such as investment grade floating rate notes and Treasury Inflation Protected Securities (TIPS). The key is owning a well-diversified mix of bonds, with an overall allocation that targets the appropriate level of risk in a portfolio.
3) The financial media never changes. Fear sells. It was noteworthy that during the first quarter, the financial media treated a 10% stock market correction as if the apocalypse was upon us. For some historical perspective, over the past 38 years, the average intra-year drop in the S&P 500 has been 13.8%! The media would have you believe a 10% correction is out of the ordinary. Tune-out the noise. All of the current media talking points – rising rates, inflation, removal of Fed stimulus, trade policy, politics – can be spun both positively and negatively to fit a narrative. Avoid allowing outside influences and narratives to calibrate your portfolio risk for you.
One of the “most helpful plain-English resources for investors who want to demystify exchange-traded funds” – Bloomberg BusinessWeek
April 10th– Michael Natale, Head of Intermediary Distribution at Northern Trust, highlights several FlexShares ETFs to help hedge a portfolio for rising inflation.
April 17th– Danny Prince, Head of iShares U.S. Wealth Advisory Product Consulting, joins us on Tax Day to discuss the tax efficiency of ETFs and the often-overlooked impact taxes can have on portfolio returns.
April 24th– Larry Medin, Founder & CEO of Brandometry spotlights the index underlying the Brand Value ETF (BVAL).
May 1st– Ben Phillips, Founder & CIO at EventShares, discusses their U.S. Policy Alpha ETF (PLCY) which provides exposure to companies and sectors impacted by U.S. government policies and regulations.
May 8th– Matt Markiewicz, Managing Director at Innovation Shares, goes in-depth on blockchain technology and the Innovation Shares NextGen Protocol ETF (KOIN).
May 15th– Kevin Carter, CEO of Big Tree Capital, explains the investment case for emerging market stocks and spotlights the Emerging Markets Internet & Ecommerce ETF (EMQQ).
May 22nd– Todd Rosenbluth, Director of ETF & Mutual Fund Research at CFRA, talks recent ETF trends and Dodd Kittsley, Director at Davis Advisors, highlights their suite of actively managed ETFs.
June 5th– David Varadi, Director of Research at Blue Sky Asset Management, details the QuantX lineup of risk managed and “dynamic beta” ETFs.
June 12th – Will Rhind, Founder & CEO of GraniteShares, offers his perspective on the role of commodities in a portfolio and walks through several commodity-focused GraniteShares ETFs.
June 19th– Saba Capital’s Leah Jordan explains closed-end funds and spotlights the Saba Closed-End Funds ETF (CEFS).
June 26th– Phil Mackintosh, Global Head of Economic Research at Nasdaq, discusses best ETF trading practices.
All guest interviews are available through our featured section “ETF Expert Corner” at etfstore.com and can be played directly from your mobile device. Full podcasts of ETF Prime can also be downloaded for free at etfstore.com, Apple iTunes, or Google Play. ETF Prime airs every Tuesday at 3pm CST on ESPN 1510AM | 94.5FM in Kansas City and you can listen online at www.1510.com or via TuneIn Radio.
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