ETFs for a recession
Investors have been flocking to exchange traded funds (ETFs) with assets under management growing by an average annual rate of 19.4% over the past decade, according to the ETF Industry Exposure & Financial Services (TETF).
EY says, “The growth of the ETF industry continues to defy superlatives,” noting that global ETF assets totaled just $417 billion in 2005 but reached $4.4 trillion by the end of September 2017. EY predicts ETF assets could reach $7.6 trillion by the end of 2020.
An ETF is a basket of securities that offers investors a diverse portfolio without the complication and expense of buying multiple individual securities. There are dozens of ETFs for different investment styles and for different phases of the economic cycle.
In 2018, concerns about the economy started to percolate into investors’ lexicon after a period of low market volatility. There appears to be no immediate threat of a recession, but the length of the economic expansion (now more than nine years) and the flattening yield curve has unnerved some investors.
FOX Business talked to Stephen Laipply, managing director and head of U.S. iShares Fixed Income Strategy at BlackRock, about the state of the economy and what ETF investments those who anticipate an economic slowdown could look to.
“Right now investors are mostly staying away from longer-dated treasuries, but if you look at history, longer-term treasuries could perform well if the economy slows down,” he said.
Laipply pointed out iShares 20+ Year Treasury Bond ETF (TLT), which returned 43% from the time the Federal Reserve started cutting rates in 2007 to when they paused in 2009, as they were trying to stimulate the economy.
FOX Business also asked Laipply about the yield curve and concerns about a recession. A flat yield curve has preceded many recessions, and now with the yield curve flattening, some market participants are becoming concerned. There are divided thoughts about what the shape of the yield curve means right now, but according to Laipply, “a look at history” tells you that the yield curve “should be respected.”
Market experts are not expecting a recession anytime soon. Leo Grohowski, chief investment officer of BNY Mellon Wealth Management, told FOX Business that they expect the S&P 500 will close the year around 2,850 points, noting that the market will be “choppy.”
In the second half of the year it will be a continued tug-of-war of the positive impact of earnings and the economy and negative concerns about trade, inflation and monetary policy, according to Grohowski.