ETF Edge - How to position amid escalating Middle East tensions 6/23/25

Episode Date: June 23, 2025

Continuing developments in the Middle East adding to investor uncertainty. Should ETF holders modify their portfolios now… or stay the course through the second half of the year?       Hosted by Simplecast, an AdsWizz company. See pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ. Let's rethink possibility. Investco Distributors, Inc. Welcome to ETF Edge, the podcast. If you're looking to learn the latest insights on all things, exchange, traded funds, you're in the right place. Every week we're bringing you compelling interviews, thoughtful market analysis and insight,

breaking down what it all means for investors. I'm your host, Dominic Chu. Continuing developments out of the Middle East are keeping investors on edge for sure. So how are investors protecting their portfolios? Here is my conversation with Matt Bartolini, head of Spider America's research at State Street Global Advisors, alongside John Dobby, this chief investment officer at Astoria portfolio advisors. Let's start with the bigger picture right now, especially in light of what's going on in the Middle East at this moment. What we have right now as a situation where as of right now, the reports are President Trump is in the White House

Situation Room speaking with his national security team. Also at this time, there are reports of what are characterized as missiles and or explosions over places like Qatar, Bahrain, and Kuwait. With all of that now placed in context, let's talk a little bit about international investing right now. Is the trend, likely to continue in the second half of the year, Matt, that we've seen without performance in some of those international versus U.S. type investments, specifically in equities, or has the geopolitical picture convoluted and upended that entire thesis of what happened in the first half of this year?

Yeah, I mean, I think when we look at the flow patterns, you start to see a divestment away from U.S. assets in the first part of the year based on some of the macroeconomic trends in terms of monetary policy, just less constraints by central banks overseas to ease and offer that liquidity impulse, but then also some extended valuations in the U.S. Then a mixture in some other geopolitical news and headlines around the sort of one big, beautiful bill and the sort of tax associated with that, and there was sort of a bias to go overseas. I think what we see now with the geopolitical conflicts in the Middle East, I'm not sure if that'll completely upend it.

I think we might have an impact on sentiment, but we had started to see a broader divestment away from U.S. or just say lesser investment from U.S. there are still positive inflows, but we saw greater inflows into non-U.S. equities than their market share would indicate. I think that trend will likely continue in the second half. John, one of the big important points here is that, you know, for the most part, many investors, whether they're retail or institutional, are allocating towards models or trying to target towards buckets specifically, and they alter the constitution of those buckets and the waiting of them to maybe adjust for the times.

As an institutional investor yourself, I'm sure you have international or global type investments within your client allocations. Are you changing them at all, given what we're seeing right now in the Middle East? Well, we would say that, you know, you shouldn't react to entry day news. You know, you should have thoughtful portfolio

construction to plan for periods of uncertainty. But, you know, at Astoria, you know, we believe investing across asset classes. So we would have stocks, bonds, commodities. Commodities typically do well when you have geopolitical risk. You know, obviously you can, you'll see oil go up, you know, gold go up. So that helps. And I do think that you have to have alternatives in your portfolio as well. So, you know, 2025 so far year to date, you know, has been all about the multi-ass portfolio, the old web. the portfolio, you know, by our measure, that 60-40 portfolio that has allocations towards gold, commodities, real assets, international, international equities, NFX, NFX, has outperformed

the SP 500 by 200 basis points year to date. So I think that, you know, is comfort in. Obviously, you have a lot more geopolitical risk, you know, compared to normal year. So, you know, I would say don't overreact to intraday news, but, you know, you should evolve your portfolio if you're just holding, you know, spies, cues, cues, and T-Bill, which is what the narrative typically was the last few years. Okay, so with that in mind, you have then not, by your implication, you have not made any changes right now, given just what we've seen in the last couple of weeks. You're still comfortable with the way that you've allocated so far right now. And just for the kind of record for the viewers and listeners out there, what is your baseline allocation model? Everybody's different,

But when you have a model portfolio, you kind of put a one-size-fits-all to the best you can and then adjust based on circumstances. What does it look like in terms of allocation right now? So at Astoria, we are sort of neutral between like stocks and bonds. Between U.S. and non-U.S., we are very, very close to being neutral, like maybe 1% of U.S. And part of that, Dom, is because we thought that international equities were very, very cheap. You know, obviously there's a lot of defense spending that's going on in Europe. I mean, they're just cheaper, right? So in big risk off environments, which, if that's a concern from investors, you know, U.S. is trading that, you know, Cape Chilipi ratio of 22 and a half, you know, very, very expensive, whereas international markets are a lot cheaper.

So I would say, you know, the real differentiator from our side is that, you know, we are big believers in owning, like, you know, gold, commodities, energy equities. So the technical term is, like, you know, let's say gold and energy equities have, like, positive skewness. when you have an attack like today, what we're seeing live, you know, those instruments will go up, whereas U.S. stocks will go down, right? So that's just helpful to have in a diversified portfolio. Okay. With that in mind, Matt, let's talk a little bit about what the flows are showing. You alluded to some of those flows just a few moments ago. I wonder if you could tell us a little bit more about just what you're seeing in terms of where investors are and traders are going over the last couple of weeks. You know, John just took us through a lot of the asset classes that he's dealing more actively with.

There are also, of course, if there's an asset class out there that you can trade, there's an ETF that tracks it as well. So in the ETF landscape, are you starting to see more movement around some of these traditional geopolitical conflict-centric assets like gold, like crude oil? Maybe you could call cryptocurrencies these days loosely part of that portfolio as well. defense stocks I can think of as part of that story. Those are the ones that are traditionally thought of. Is that what you're seeing right now, more activity there, or is this time slightly different?

No, I think this year, even so in the last couple of weeks, we've just seen this idea of investors building more resiliency into their portfolios. I think many investors heading the 2025 actually had very unresilient portfolios. They're very concentrated in U.S. equities. It had been a trade that had worked for quite some time. The US equities out of the last 15 calendar years. But investors are very concentrated in equities and very concentrated in U.S. equities. We're very resilient to the wide range of outcomes that we're seeing in marketplaces right now,

particularly as it relates to impacting growth in inflation dynamics. The growth in inflation dynamics this year are far different than the past, you know, five years, 10 years, 15 years for whatnot, particularly falling growth in the aspect or the notion of potentially rising inflation or inflation instability. And I think what we're seeing now with the conflicts in the Middle East, but also in Eastern Europe as well, is the sort of reaction function to the inflation channel. You know, if we see the spike in spot prices of oil, that it will have a transmission mechanism back into CPI, which could inflict higher inflation surprises.

And that's why you do see some commentary from Federal Reserve officials, even over the last couple of weeks of being more wait and see until you start to see those effects take place, in addition to even just the sort of potentially transitory nature of tariff inflation-led surprises. So what we have seen this year is inflows into gold. Over 10 billion of inflows into gold, they react very differently, as John was pointing out, to surprises in the macro landscape, but also to the impacts of inflation and growth. Inflation-linked bonds are another way. We've seen resiliency added over 7 billion of inflows so far in 20,000. 2025, another 500 million or so just in June alone.

And in the same token, building resiliency is offering up some diversification. So as we're just talking about a few minutes ago, diversifying geographically, not being so concentrated in U.S. equities, but going overseas more so than you had over the last handful of years. But then again, going into something like energy, which does, as John was pointing out, has a different reaction to events in the Middle East, two events to the oil infrastructure than, say, stocks do. So that's where we see some of it. And then of course, aerospace and defense spending is likely to increase, not just because it was happening in the Middle East, but what we saw in

the earmarks of the one big beautiful bill of 13% increase. And so we see aerospace and defense ETFs roughly 700 million of inflows over the last few weeks. Again, investors are starting to position for different geopolitical risks, but also just the big trend is infusing some resiliency into a portfolio in being more diversified and preparing and not so much predicting for what happens next, because I think it's whatever happens next is really anybody's guess. Sure, and that's one of those things that we have to deal with now, is that you're going through multiple situation or scenario type analyses, right? You're trying to handicap certain outcomes and what you think the reaction in the market will be.

One of the things I want to talk a little bit more about, and we'll start with you, John, about this, is, During Matt's response, we showed you the intradate price action right now with missiles reportedly flying over the Middle East, explosions happening, U.S. and military assets possibly being targeted directly. And yet intraday, as of this moment, we are seeing oil prices take a decent size fall. They're down about 5%. We're also seeing gold prices rise only fractionally in this whole situation. I mean, you could say buy, rumor, sell news, but it feels as though things are slightly maybe not intuitive. What's happening with the market right now is just not intuitive.

And John, I wonder what it says to you as a chief investment officer when you see seemingly escalating military conflict in the Middle East with a reaction function for commodities and gold that doesn't exactly click with those developments. Yeah, we would probably, you know, want to see, you know, a few more data points, a few more days, you know, if not a week longer, just to see, okay, what is the, I mean, if this is a major cataclysmic risk off event where the S&P goes down, you know, 15, 20%, you know, oil and gold will de-risk lower just because it's a broad base, you know, kind of risk, you know, bringing exposures down, right, nets and gross down. But, you know, I think the market just needs to kind of get more. you know, see more data point to see, you know, if you're really going to kind of, you know, de-risk off further than it is now. So I'm sort of not surprised, you know, we sort of rallied overnight, you know, rallied at the open. Now there's, you know, more news speculation, so a little bit of risk off, but it's too early to tell, I think. All right. As we talk a little bit more, Matt, about this ongoing issue with the markets and how they're pricing things, is there a way that we can look perhaps for investors to hedge traditional portfolios. What exactly are you seeing

in terms of maybe some contrarian ideas that are coming into favor with regard to some of this particular type of move? We've talked oil and gold, and maybe I've even alluded to, you know, crypto and Bitcoin, but how exactly are you seeing possibly either investment advisors or retail investors maybe look to kind of position themselves, given what we are seeing in the news right now. So I think there's been a handful of trades or allocations that would sort of intuit where advisors are starting a position for this market to sort of mitigate some of the geopolitical lead volatility. It mentioned earlier, gold, inflation-linked bonds, even short-term T-bill ETFs. You know, going into cash in case risk premiums widen, and you'd be sort of insulated

from that, from that perspective. But one of the areas I think we've seen allocations sort of exists outside of the geopolitical sphere, and it's actually more fundamental. mentally driven. So we've seen sizable inflows in the communication services ETS, you know, roughly about a billion dollars or so. And we think about, you know, what are some of the other mega trends or headlines going on about there? And it's, it's AI, it's enhanced connectivity, cloud computing. And that's really where communication services firms really live, right? They're able to, you know, have that exposure to Magnificent Seven, high cash flow equities, low debt to equity, you're not really going to be impacted by the Fed keeping rates elevated

for quite some time. They're more service-based. They're not going to be embroiled in a lot of the tariff-related volatility. So I think that's one area. It's like look outside of the sort of cause-and-effect relationships we're seeing from a geopolitical and macro perspective. And where there are fundamental tailwinds to help sort of insulate from the macro, I think communication services is one of those. And we look at it on a cross-asset momentum trend basis. It ranks one across all other sectors when looking at our momentum ranking, too. And I think that speaks to some of this fundamental durability. All right. And of course, now there are ETS where you can track some of the specific factors that you're referring to as well right now. John, I'll end with you and maybe some of

your best ideas, given what we are seeing right now. Is there anything that you think, given the recent price action, might be an opportunity or a place you want to go to in terms of a possible relative safe trade? Yeah, so I'll give you two ideas. One is an ETIF we manage PPI. The second one is from Bank of New York Mellon, BKGI, which is an infrastructure ETF. So, you know, 30-5 years ago, we, you know, M2 money supply exploded. We increased our balance sheet. You know, we flooded, you know, the market with dollars. And, you know, in my economics one-on-one class, they taught me that if you restrict supply, you increase demand, you know, prices go up, inflation goes up. So we launched PPI. And in the last three and a half years, we, we,

We've beaten the S&P 500 and no one thought that inflation would be, you know, higher, sticking for longer. So we beat the S&P 500 by about 500 basis point. Here today, it's up 11 percent, as you see on the screen. S&P is up two. So nice, relatively, you know, healthy outperformance. And, you know, gold is actually like 9% of this fund. So it's a very high conviction view that we have.

The second one is BKGI, which is on the screen, infrastructure stocks. it plays into like, you know, also this elevated levels of inflation. It's a global basket. It's up 27% year to date. You don't find too many things that are up that much in the marketplace. So it kind of tells me that, you know, there is a trend, you know, it is clearly, you know, an elevated level of inflation, you know, and just these are cheap stocks at the end of the day. The P.E ratio of BKGI is 13. So our fund PPI is about 16.

So S&P 22 and a half. So, you know, the idea is that you want to mix some of these, you know, idiosyncratic bets in the portfolio. They are value stocks, value investing can work, even though that gets a lot of scrutiny. But, you know, both the plays on just, you know, kind of real assets, elevated levels of inflation. Now it's time to round out the conversation with some thoughtful analysis and perspective to help you better understand ETFs with our Markets 102 portion of the podcast. John Davy, the CIO at Astoria Portfolio Advisors, continues with us now. John, thanks for taking the added time. We've focused a lot on the geopolitical context that we're dealing with right now.

There is also a very big macro factor at play for the markets globally, and that is the action by the Fed or inaction by the Fed. They just recently held rates steady. Fed Governor Michelle Bowman made comments earlier today saying that she would be in favor of an interest rate cut next month if inflationary pressures stay at bay. So how are investors going to juggle the Fed commentary side of things and the inflation story versus the ripple effects that could be coming out of the Middle East that could affect all of those things? Yeah. So good question. So you just said something right there. So if there, if you ask me, okay, is there more risk now than let's say a

year ago? I would say absolutely, right? You just said right there. Fed risk. inflation risk, geopolitical risk. The problem is that most portfolios that we look at from advisors is that they're still leaning long like spies, cues, cues, and they own a little bit of T-bill, right? So we would say, okay, it's time to kind of get over that trade and kind of transition your portfolio to include diversifiers like international equities,

which are cheaper that give you some, you know, sort of value protection, let's say, own some real assets that do well when you have geopolitical risk, right? like gold typically goes up, energy equities go up, oil typically goes up, so own commodities in your portfolio. So, you know, my big thing is that, like, you know, there's all these risks out there and then combine with like, you know, deficit, you know, this reconciliation bill is like another

two and a half trillion dollars. You know, term premiums are rising for bonds right now. So, you know, it's time to kind of evolve your portfolio and that's what we're kind of doing. So by our measure of 6040 portfolio that tilts to some of these things that I just said, you know, it's being the S&P 500 by about 200 basis points here to date. So S&P has like a 17 standard deviation, this 60-40 portfolio with the tilts that I mentioned and has about 11 standard deviation.

So, you know, it's a lot lower volatility and a lot more smoother portfolio. So like people think about sharp ratios in that way, right? Kind of like the unit reward for the unit risk that you would, that you absorb. Correct. If you look at it in that context, If you look at it in that perspective, you mentioned some of the assets that kind of go into the model that you have. The outperformers are fairly easy to identify in terms of the broader market.

We know that gold's been outperforming. We know that certain parts of the crypto market even have been outperforming. Certain types of equities have been outperforming. Do you feel as though given the balance of risks that you've seen so far develop over the course of the last several weeks between the Fed, between the Middle East, between the possibility of inflation flaring up or fizzling out, all of those things. Do you feel as though you want to make any kind of tactical move at this point, rather than a large-scale strategic one and changing that so-called 60-40 mix?

Yeah, so good question. So, you know, as an active manager, you're always trying to look ahead, you know, three months out, six months out, and just trying to look at all the distribution of outcomes. So, you know, we sort of brought our risk down as neutral, as it's been in our firms a year history a couple months ago. So I wouldn't react to like a move like, you know, over the weekend or today's move just because I think that's like way too tactical. We wouldn't necessarily think that we have an edge per se. But the point is that even our 60-40 portfolio of that sort of baseline, right? So we're not really overweight. We're sort of neutral

stocks versus bonds versus our alt allocation. Within equities, you know, we're like maybe 1% above, you know, U.S. overweight compared to international. But that alone is so out of consensus. Most portfolios don't want to own international, you know, equities. Now, the thing that has been helpful this year is like when you look at, let's say, something like SPDW, or you can look in the EFA, ETF, you know, that's up like 15, 16%, right? We said S&Ps up 2%. So, you know, in that ETF, you're going to get long European equity exposures and your long, the FX, right? So the dollar has massively weakened here to date because of all this deficit risk. So it's nice to have like short dollar exposures in your portfolio. So, you know, things like

BKGI, the Bank of America, Bank of New York Mellon infrastructure ETF, that's up 28%. Our fund, PPI, which is real asset fund, is up 11%. International, I just mentioned, is up like 15%. You know, gold is up 28%. GLTR, which is gold, platinum, pladium, and silver is up 24%. You know, Bitcoin's up, you know, 12%. But Bitcoin, really, the story of Bitcoin is that it's up like 300% in the last few years because everyone's been anticipating this like elevated levels of inflation, you know, this kind of currency debasement issue.

So all these risk factors are kind of coming to head once it feels like. So before we let you go, international is one of the focal points. for your kind of new, I shouldn't say new, your evolving model for allocation. That's unhedged, I assume, because you're saying that as the dollar has depreciated and those foreign currency values have gone up,

they've helped boost the returns for some of those international type investments. At the same time, it's an interesting cross-current, right? Because as we talk about a weakening on a relative basis US dollar, that also helps large multinational, firms with a large proportion of their revenues held outside of the U.S. I can think of companies like the Mag 7, Mega Cap Technology stocks.

I can think of other large-scale consumer products companies that have a lot of exposure to international revenues. Do you feel as though that dollar trend is something that you could see relatively benefiting mega-cap tech Mag 7 as well as, say, large consumer products companies that have a lot of exposure outside of the U.S. dollar. Yeah, fair point. And now with this vicious circle loop keeps coming back, back to the mega-cap trend.

And yes, that's why I wouldn't necessarily give up on your large-cap equity exposure. I'm just saying tilt-away. And when we say tilt-away, we didn't say like tilt-away towards all international. Like we have ETFs in our portfolios that we're sort of tilting, but within the U.S. But yeah, I mean, I think that's why you sort of own both,

right, you know, strata between both, half, you know, 50% U.S., 50% non-U.S. We're also not saying, like, I just think where we are in the cycle, like after 2 25% back-to-back years in S&P, S&P's like being driven by like those seven stocks, they make up 20% of their earnings, 35% of their market cap weight. You know, it just feels not prudent as a portfolio manager if you just concentrate on that one bet, let's say.

But you're right, the weaker dollar is a little bit of a tailwind for the multinationals. All right. John Davy, thank you so much for joining us here for the Markets 102 podcast. We'll see you again soon, sir. Thank you, Dominic. All right, well, that does it for the ETF Edge podcast.

Thanks for listening. Join us again next week or just head over to etfedge.c.cnbc.com. How does InvescoQQQQQ rethink possibility? By rethinking access to innovation and the NASDAQ 100. Let's rethink possibility. Investco Distributors, Inc.