Thanks to the Federal Reserve's interest rate hikes, investors can earn 5% or more in some of the safest fixed income today. And as the stock rally broadens, investors get more choices of the best ETFs.
That's one of the key messages Robert Williams, managing partner and chief investment strategist at Sage Advisory Services, has for clients.
"The market and the risk assets in particular price for somewhat of a goldilocks, soft-landing type scenario," he said. "Economically, we feel like the second half will be more challenging."
Finding Best ETFs Amid Fed Hikes
Williams points to the "hard-to-diagnose" lag effect due to the Fed's very rapid interest rate hikes. It's "one of the most aggressive cycles in history, and that usually lags impact," he said.
The massive cushion of Covid-related consumer stimulus adds to confusion. "It makes this (economic forecasting) very difficult," he said. "That's why everyone got inflation wrong and the timing of a recession wrong, because they underestimated that stimulus cushion."
This pushed out the recession timeline. Credit, lending and liquidity conditions are tightening. Williams believes "the market may not be fully prepared for the effects of all that's to hit us over the next quarter."
The Austin-based wealth manager has $23 billion in assets under management. About $2 billion is invested in tactical, multi-asset ETFs. Founded in 1996, Sage was primarily launched as a privately owned institutional fixed-income shop. The firm was an early adopter of stock ETFs. They first used them in 1998 to efficiently construct balanced client portfolios.
Finding Best ETFs In Diverse Areas
Over time, Sage expanded its reach. It now deploys taxable fixed income, enhanced cash management and liability driven investing. Its strategies also include tax-exempt bonds, global tactical ETFs and ESG integration.
Williams, who's been with Sage for 19 years and previously served in various positions at major financial firms, shared with Investor's Business Daily his three best ETF picks.
Best ETFs Pick: Low Volatility
Because Williams expects more volatility in the markets, he's adopted a more defensive position.
"Just because you're defensive, it doesn't mean you can't look for opportunities," said Williams.
His first best ETF pick is Invesco S&P 500 Low Volatility. The $9.3 billion fund holds 100 of the least volatile stocks in the S&P 500. The fund is overweight in utilities and staples — "These are going to have a lower beta (a stock's volatility vs. the overall market) when the markets reprice for that economic risk," he added.
Top holdings include Johnson & Johnson, McDonald's and Coca-Cola. SPLV yields 2.2% and charges 0.25% in annual fees. It's up 0.61% so far this year.
Best ETF Pick: Go Global
The second best ETF reflects Williams' focus on markets and regions that are trading at a discount to the U.S. and are less volatile versus global equities.
"We think Japan is interesting and it's been getting more press lately," he said. "We've had Japan overweight now for several months."
JPMorgan BetaBuilders Japan tracks the Morningstar Japan Target Market Exposure Index. It invests in stocks traded primarily on the Tokyo and Nagoya stock exchanges. The $9 billion fund is fully hedged to the dollar, which means it won't be subject to any currency swings.
Japan was one of the last countries to reopen after Covid-19, says Williams. Its stock market was heavily discounted. Meanwhile, it's gaining traction as tourism is picking up. Further, Japan's monetary policy has been different from the rest of the world.
The fund yields 2.1% and charges just 0.19% in yearly fees. That's lower than its closest competitor, iShares MSCI Japan with a 0.5% fee.
Meanwhile, BBJP provides a similar broad exposure to EWJ. "And if we're going to hold that position for a while, I'd rather hold that position at 19 basis points," he noted. "For this one, (cost) is a little bit of a factor."
BBJP is up 17.84% year to date. Top holdings include Toyota Motor, Sony Group, Keyence and Mitsubishi UFJ Financial Group.
Best ETF Pick: High-Quality Bonds
For his third ETF pick, Williams recommends a high-quality fixed income fund. IShares MBS invests in mortgage-backed securities, including those issued by government-sponsored agencies such as Ginnie Mae, Fannie Mae and Freddie Mac.
The $27 billion fund yields 3.05% and costs just 0.04% in annual fees. It is up 1.78% so far this year.
"We have a big overweight in our institutional portfolios on the mortgage-backed space and we've had that for a while," explained Williams. "There are only a couple of mortgage-backed ETFs. MBB is really the king of that (area)."
For fixed income portfolios, mortgages make a lot of sense as they provide a yield that's very comparable to the credit market right now, he added, while providing AAA quality and liquidity.
"It's not a sexy pick by any means," he said. "You don't get much more plain vanilla in the fixed income market than MBB, but people sometimes forget about it. Not having mortgage-backed exposure (in a bond portfolio) is like not having technology if you're trying to run an S&P (portfolio)."
Robert Williams
- Sage Advisory Services
- Managing partner and chief investment strategist
- Rising interest rates present investors with more choices among ETFs that could enhance portfolio returns, Williams says. He thinks select global and income funds could fare well in this rate environment.
