Navigating volatile markets with ETFs

By: BlackRock Canada

High inflation and aggressive monetary tightening have rattled financial markets this year. “To say the least, there’s a lot going on,” says Gargi Chaudhuri, head of iShares Americas investment strategy at BlackRock. “Economies around the world face the challenge of higher inflation and higher interest rates in a slowing growth environment.”

Investors are responding in particular by increasing the use of exchange-traded funds (ETFs) in their portfolios, to help manage volatility and seize opportunities in these turbulent times in the markets. “We’ve certainly seen increased adoption of ETFs across all customer segments,” says Helen Hayes, head of iShares Canada, “not just from a retail perspective, but also among pension plans, asset managers and family offices,” she adds. “In fact, as of the end of September, the Canadian ETF industry overall recorded organic growth of 7.2% this year.[1].”

Helen Hayes
Head of iShares Canada, BlackRock

In a study of institutional investors around the world earlier this year, it was found that 43% of North American institutional investors are more likely to increase their use of ETFs over the next 18 months.[2]. “We’ve seen institutional investors continue to use ETFs for tactical and strategic purposes, from low-cost building blocks in portfolio construction to alternative uses,” shares Hayes. “For example, we see clients using ETFs as a complement to derivative strategies or implementing factor investing using ETFs. Hayes also explains that in difficult market conditions, the liquidity of ETFs is a key benefit. This is particularly the case for fixed income securities, “every time we have seen increased volatility in global markets, we have also seen increased strategic cash management from a fixed income perspective. fixed income,” says Hayes. On a more positive note, says Hayes, institutional investors also benefit from the diverse range of equity and bond ETFs for tactical allocations to specific market segments or geographies.

In Chaudhuri’s view, macro factors — higher inflation, rising discount rates and geopolitical uncertainty — are increasing the likelihood of an economic slowdown in Canada and elsewhere. This would clearly impact corporate earnings to an extent that may not yet be fully priced into equity valuations, adds Chaudhuri, and she expects continued equity volatility at least until banks power plants interrupt their tightening cycle. As a result, “we generally remain defensive on the equity side,” she says.

Given the challenges, Chaudhuri recommends investors consider equity exposures that can help mitigate volatility and focus on quality. Two options to consider: iShares MSCI Min Vol USA Index ETF (XMU), which provides low beta exposure to high quality stocks, and iShares Core MSCI Quality Dividend Index ETF (XDU), which tracks a portfolio of US stocks with solid financial data. , above average dividend yields and stable or increasing dividends.

Gargi Chaudhuri
Head of iShares Americas Investment Strategy, BlackRock

Chaudhuri adds, however, that investors could find alpha-generating opportunities in commodity stocks, particularly in energy and agriculture. Disruptions to global food and energy supply chains, in part due to geopolitical tensions, and future increases in production are limited by a history of underinvestment – two factors that could support prices and corporate earnings in the future. ‘coming. With iShares Core S&P/TSX Capped Composite Index ETF (XIC), investors can gain broad exposure to the heavily commodity-based Canadian market, while iShares S&P/TSX Capped Energy Index ETF (XEG) and iShares Global Agricultural Index ETF (COW) offer more focused exhibits.

While she suggests playing defense on stocks, Chaudhuri says bonds are a different story. In fact, yields have risen so much that fixed income securities now offer attractive income generation. In addition, bonds could serve as ballast for equity allocations in the event of a downturn, as they have traditionally done. Meanwhile, Chaudhuri says macro forces suggest higher inflation could persist in the short to medium term, making inflation-linked bonds attractive. “We believe that bonds now offer pockets of opportunity,” she explains, “and particularly short-term corporate bonds and the inflation-linked front-end of the market.”

To express these views, investors can consider iShares Core Canadian Short-Term Bond ETF and Short-Term Corporate Bond Index ETF (XSB and XSH), iShares 1-5 Year US IG Corporate Bond Index ETF (CAD-Hedged) (XIGS) and iShares 0-5 Year TIPS Bond Index ETF (CAD-Hedged) (XSTH), which tracks inflation-linked US Treasuries with maturities of less than five years.

There is no doubt that 2022 has been a difficult year for financial markets. Yet ETFs help institutional investors reap the benefits of their low cost, liquidity, price discovery, and ability to capitalize on opportunities regardless of market conditions.

Visit BlackRock Canada for more information and timely investment ideas.

[1] As of September 30, 2022. Source: BlackRock
[2] Institutional Investor Survey Q1 2022:

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