There's no reason right now to make a bet on the currently very speculative market, says Philip Blancato, president and CEO of Ladenburg Thalmann Asset Management. Instead, he says, investors are being paid to wait — and some of the best ETFs can accomplish just that.
"You have to be very careful," said Blancato, who's also chief market strategist at Advisor Group. "Because the narrowness of the equity market (could) be a trap."
What he means by "trap" is that just eight stocks represent more than 80% of the S&P 500 return this year. Those include Google's parent Alphabet, Facebook owner Meta Platforms and Tesla.
This puts investors in a scenario where if any of those eight fall apart, it suddenly puts cracks in the others as well. While he doesn't expect these to ever go back to where they were, "I do think it stands to reason that it's the kind of environment where we're going to trade sideways for an extended period of time."
He added: "Those eight can only carry so far. The rest of the names are in an earnings recession."
Not A Recession, But A Mild Slowdown
Ladenburg's asset management arm has been investing clients' assets for over 19 years. The firm has nearly $5 billion in assets under management and employs passive as well as active strategies. It not only works with separate clients, but also helps independent investment advisors. The company provides 34 model ETF portfolios in addition to other investments.
While Blancato doesn't expect the U.S. to land in a severe recession, he believes a mild slowdown could be on the horizon. A combination of earnings contraction, a slowing economy and a relatively strong U.S. consumer "puts you in a sideways environment."
As such, he expects higher yields and higher interest rates to be around for a while because inflation is not coming down very quickly.
"I call this an ebb tide," he said. "Not high tide, not low tide, but an ebb tide. And when you're doing an ebb tide, you're getting paid to wait around by owning dividends."
Longer Duration and Best Dividend-Paying ETFs
With this in mind, he shared with IBD three of the best ETFs that he believes will help investors bridge this period.
"Obviously, fixed income has been an incredible place to be in now for at least over the last few months," he pointed out. "I think the opportunity in fixed income is profound, in that you can add real return on your bond portfolio, and in some cases equity-like returns."
So, on the fixed income side, he favors longer duration, while on equity, some of the best dividend-paying ETFs.
The Cash Cow For Best ETFs
His first pick among the best ETFs is Pacer US Cash Cows 100. The $13 billion fund invests in the top 100 companies of the Russell 1000, based on free cash flow yield. This measure helps to select companies that produce more cash than what they need to run their operations, and invest in growth or pay out as dividends. The fund's fact sheet says the highest trailing 12-month free cash flow for the 100 companies has been 12.61%.
COWZ's top holdings include McKesson, Zillow Group, Builders FirstSource, Cisco Systems and Booking Holdings. The fund's 30-day SEC yield is 2.22% and it's down 0.14% this year. It charges an annual fee of 0.49%.
The Ultimate Recessionary Hedge
On the bond side, he likes SPDR Portfolio Long Term Treasury. The $6.7 billion fund invests in U.S. Treasury securities with a remaining maturity of 10 years or more.
"I think it's more of an equity position than a fixed income position," said Blancato. "Long bonds (have) much more volatility and have a high correlation to the S&P 500."
He said that with an "expense ratio of 6 basis points (0.06%), a current yield of 3.75% and if I'm right that the rates will go down, not only am I getting a significant yield, … but beyond that, I'm getting price appreciation."
As a result, the fund could serve as an ultimate recessionary hedge, he added. The fund is up 3.38% this year.
Best ETFs: Equity Exposure With Less Volatility
His third ETF pick is JPMorgan Equity Premium Income. The $26.4 billion fund scores a whopping 8.48% yield and charges a yearly fee of 0.35%.
It is an actively managed fund that seeks to provide equity exposure with less volatility. At the same time, it generates monthly income by selling out-of-the-money S&P 500 index call options.
Blancato says that this fund is similar to COWZ, but in addition to income, investors can also get some risk-adjusted return (alpha) from the fund. The managers use a defensive bottom-up approach to select stocks and "are very good at it," he said.
Top holdings include Microsoft, Amazon and Adobe. Microsoft is on the IBD Long-Term Leaders portfolio list.
The fund is up 3.68% so far this year. "While it's not matching the S&P 500, with this kind of dividend, eventually it will," he said.
Philip Blancato
- Ladenburg Thalmann Asset Management
- President and CEO
- Blancato thinks the economy and market are in a neutral spot, so it's wise to make investments with solid returns until there are better opportunities.
