ETF Edge - Weathering the Storm – One of the Most Volatile Years on Record 06/22/22

Episode Date: June 22, 2022

CNBC’s Leslie Picker spoke with Matt Bartolini, Head of SPDR Americas Research at State Street Global Advisors, and Andrew McOrmond, Managing Director at WallachBeth Capital. They discussed a number of ways ETF investors are weathering the year’s treacherous market volatility – including a deep dive on a handful of popular dividend, value and commodity plays. Hosted by Simplecast, an AdsWizz company. See https://pcm.adswizz.com for information about our collection and use of personal data for advertising.

The ETF Edge podcast is sponsored by InvescoQQQ, supporting the innovators changing the world. 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 breaking down what it all means for investors. I'm Leslie Picker, filling in for Bob Bassani. 2020 has been the most volatile non-recessionary year on record, according to one metric.

Today on the show, we'll discuss how ETF investors are weathering those treacherous market moves, including a deep dive on dividend, value, and commodity plays. Here's my conversation with Matt Bartolini, head of Spider-America's research at State Street Global Advisors, along with Andrew McGoormand, managing director at Wallach Beth Capital. Andrew, I want to start with you. What are you seeing with regard to flows to kind of dividend, quality, value plays? And what does that indicate about an investor skittishness regarding this current bout of volatility? Well, there's going to be a group of investors that have to have yield, have to have some income coming in.

And as we've seen, unfortunately, fixed income hasn't performed like we wanted it to or, you know, like it's expected to in this environment. So you have to get some yield out of it. You've got to get some dividends. That's what we've seen. Spider has a great. great lineup of products to do that. And I think today was really interesting, just to be timely, I don't really remember, you know, where the market kind of didn't, SDY is a perfect one up on your screen where the market didn't stay down. So today was really encouraging. Of course, that doesn't

mean I think we found a bottom, but that's a positive sign today that the market was able to rally versus just that snapback off of yesterday. And we've seen, you know, people beginning to dip their toes in the water and all kinds of equity products a little bit. Money has to be put to work. So if you're going to do it, you know, value in dividends are a good way. What does the overall picture look like for dividends at this stage? There are bank stress tests out this week. Several analysts notes saying, you know, don't expect too much in terms of a raising of dividends and buybacks and so forth. Are you seeing companies really kind of look to preserve their cash and not distribute in dividends? And how is that affecting the overall picture

for the ETFs you track? Well, I mean, I think we're not seeing companies cut. dividends yet, right? And so there's obviously concerns around growth and we've seen winning earning sentiment, but we haven't seen any trepidation with respect to firms' dividends and removing them lower. And I think when we think about allocating to dividend strategies or recommending them to investors, we always like to ensure that there's a modicum of stability and quality at those. And that's why it's something like SDY has that rigorous screen of 20 consecutive years. That's just the initial threshold to get into the index. There are some firms that have increased their dividend for over 50 consecutive years. And they have clearly seen some market cycles that are

probably even worse off than what we're going through right now because we are not entering a recession. Economic growth continues to be positive. Ernie's growth continues to be positive, albeit it is slowing. So I think what we want to keep an eye on is those firms that have consistently raised dividends. So if there is a concern around dividend growth, that these firms have been able to withstand both economic and fundamental volatility historically. Andrew, I see in the producer's notes here that you're noticing some selling in commodities funds and you think they are perhaps going into value funds or value stocks. What do you think is behind that?

Do you think that suggests that investors believe that the gains in commodities that we've seen over the last year and a half or so have kind of peaked at this point? That's exactly right. Just a rebalance. There was a good trade. It was an effective trade to kind of weather the storm a little bit. And now, just like Matt said, really, you're getting value, you're choosing quality, right? There's just, this is not going to be a V-shaped recovery.

I mean, it's clearly going to be a you, in my opinion. And you just have to start, again, putting money to work. Yes, all these stocks have been beaten down. And if we have a further 10% drawdown or something, you know, along those lines, everything will be dragged down with it. However, again, if you're systematically putting money to work, quality usually is correlated with dividends. or dividends that are done on a regular basis and increasing dividends. So I think that's what that is.

That's a trade just like I think we'll see some people getting out of the energy trade and just putting money back to work. It's just a little scary to do it in tech at this point. And Matt, have you seen that inflection point so far with the dividend trade? You mentioned that many of them have outperformed the respective market exposures by pretty dramatic amounts so far this year. Do you think that they're close to reaching that point where investors say, okay, I've gotten too much exposure?

Maybe I should look for other opportunities in this current environment. Not really. I mean, I think when we take a look at some of the underlying exposures, there is that value bias. We like value as a factor, just given its inexpensive starting point relative to the rest of the marketplace, but also from a value perspective, earnings growth estimates are nearly in line with gross stocks, but you're paying a cheaper multiple for those.

There's also some macro underpinnings to it as well. If you look at these sector allocations, they tend to be sectors that are more highly correlated with rising interest rates, rising inflation. You think like energy materials, bank stocks, there's a positive correlation of value stocks, excess return to rising interest rates, while growth stocks have a negative correlation. So we like value from that perspective. At the same time, this aspect of quality has been rewarded. Take a look at it.

Profitability has been paramount in this. type of market cycle, we've seen profitable stocks outperform unprofitable stocks for 12 consecutive months. As we know, dividend equities, so stocks that pay a consistent amount of dividend, they generally are profitable because they're not going to pay out if they are unprofitable. So we like this overlay of quality and this emphasis alongside value. So even though they've withstood some of the near-term volatility much better than the marketplace, I think there's still more room to run here, given the macro fundamentals, or

macro foundations as well as the fundamental foundations within these type of strategies. And Andrew, what do you make of kind of the correlation or the interplay right now between dividend stocks and bond ETFs? You know, you mentioned that investors are in a hunt for yield. Are they finding it to be better or more beneficial in these dividend ETFs or in bond ETFs, given kind of, you know, adjustments for risk, volatility as well as potential. upside. It's a great point. I think what, you know, you get the intelligence that Matt is giving us. And for those of you that don't do it on your own, you can start to think about active management, right? Whether you're choosing a manager or you're just simply doing it yourself, choosing

ETS that are active. So there always be money going into both, right? So SRLN is the state street senior bank loan ETF, which is actively managed, right? So you're getting the benefit of that. Why is that important because they are choosing the particular bonds in the portfolio to get away from just being part of this massive index being brought down. And you're depending on Blackstone's ability to pick the right bonds to outperform. This is the time to do it. We're coming through a 10, 12 year cycle where you could just be passive, you know, even if it was State Street or Black Order Vanguard. They all have products that you could set it and forget it, fixed income or equity. and maybe if you're in those products and you have a long-term time rise,

and of course now is not the time to probably sell. But if you have new money to work, either going in an active ETF, if you're in fixed income in this particular case, like the SRLN, which we like, or one of the managers that are on your show all the time, Howard Capital Management or Adaptive or CS McKee, they can kind of make those choices because doing the overall broader market, meaning just the S&P or even the Russell or just doing, you know, the aggregate, the ag, ETF, you're really just kind of exposed to all the economic down things, down cycles that we have to work through in the next six months to a year. And it might be a good time

for active management. Again, whether you're choosing the ETF or whether you're choosing the manager yourself. And even if you're choosing the dividend stock stock ETFs that we just talked about, you're using your head and you're thinking, hey, I need quality, not just the overall market. I think that's going to be the trend in both fixed income and equities going forward. Matt, what's your take on fixed income versus some of these dividend funds? Do you think that there is an opportunity there as well for investors seeking yield? Or is dividend pretty much the place to be? No, I think there's definitely obviously a role within fixed income.

In our view, in our mid-year outlook that we released last week, we talked about limiting duration in the pursuit of real income. In a product and a solution like SRLN, it's one that can do that because of the floating rate nature of the underlying loans, where you basically have a duration roughly around 0.25 years, and your yield can be upwards of 5%, in some cases, on some of the underlying loans. But at the same time, you can use something like in the investment grade space, floating rate notes there as well, where you have a duration of, you know, essentially 0.07 years. Your yield is, you know, going to be roughly around, you know, 1.5%, perhaps even more. And that's another way to sort of limit some of the risks in the marketplace because fixed income investors

have basically been even more impaired from a return perspective as equities. When you look at the ag, this down, you know, double digits, it's actually going to have, you know, unless there's a massive rebound, which is unlikely, it's going to have the ags going to have two consecutive years of double, of overall declines. That's never happened before. So for fixed income investors, you need to, you know, in our view, limit some of that duration risk as you pursue real income. And that's why we like these ultra-short type of strategies. And investors tend to agree. If we look at bond flows in the month of June, overall, fixed-income ETF flows are in net outflows. And that's been largely dragged down by high-yield, investment-grade corporates, some of that, you know, where duration does play a role.

What has done well is these ultra-short, particularly ultra-short government bond ETFs have taken a significant amount of flows. And I think that's where investors are trying to hide out as we navigate through these periods of really episodic and elevated volatility. Yeah, it's clear that there's some hibernation going on. Investors just looking for any kind of perceived safety areas to withstand some of the volatility. Gentlemen, thank you so much for being here. Matt, Andrew, really appreciate your commentary, really interesting conversation. That does it for this week's episode of ETF Edge. I'm Leslie Picker filling in for Bob Fassani. Thanks to everyone for tuning in. And just a reminder, you can always find all of you. our latest shows and podcast episodes online at cnbc.etfeds.com.

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