The drivers for investment through ETFs in 2020 and 2021

Deborah Fuhr Welcome to ETF TV. I’m Deborah Fuhr. Year to date, we have seen 530 billion dollars flowing into ETFs this year, really been driven by reactions to COVID-19, the volatility, US elections and the recent news about vaccines.

Dan Barnes And I’m Dan Barnes. Today, we’re going to be discussing the big investment themes for this year and next year, and looking at how ETF options are being used to position and hedge against them. Joining us, a Karim Chedid, senior investment strategist for BlackRock ETFs and Index Investments Business, and Matthew Riley, buy-side equity and index sales at Eurex. Guys, welcome to the show.

Karim Chedid Thank you. Very nice to be here.

Matthew Riley Thank you very much for having me.

Dan Barnes Graham, can I start with you, what’s your broad market outlook for 2021, and where is your highest conviction?

Karim Chedid We’re looking at a rebound in the economic cycle; as economies reopen or continue to reopen with fairly temporary damage so far. We don’t have any major signs of concern around the COVID-19 pandemic and the economic damage being permanent, and bankruptcies are low. So as the economies reopen, we’re looking at the cyclical rebound at the macro level, even a rebound at the micro level with earnings, so broadly it should be a more positive year for risk, with equities well-positioned. But our preference is for credit over equities in this environment, where cash flows are still strained. And in terms of conviction, I think China is an area that really stands out. We’ve seen a huge acceleration in demand for China assets across bonds and equities, and I think that trend has legs in 2021, as China comes out resilient from this crisis.

Deborah Fuhr What are the main risks that you’re keeping an eye on and how are you thinking about hedging against them?

Karim Chedid We’re looking at markets now, pricing in a situation where we’re getting some sort of vaccine rollout. We don’t know the exact timing, but around spring seems to be a sensible expectation. So I think the biggest risk is around, ‘how much worse is it going to get in Q1 before it gets better? And if it does get much worse, in terms of the virus situation, can we carry on without more lockdowns?’ The more lockdowns we have, the higher the risk of the damage to the economy becoming a bit more permanent, so that is, I think, a key risk.

Dan Barnes Matthew, do you have a perspective there, on hedging?

Matthew Riley So from our point of view, obviously, we see the flows in the equity books, but possibly of more interest and leading into Karim’s comments on corporate credit is the dividend strips. Obviously huge uncertainty, disruption, in the dividend market earlier this year, which was painful for many members and their clients. We responded to some of those fears by introducing new maturities on some of our dividend futures, to allow people to fine tune their hedging a bit more. And as we go forward, I think that’s going to be a big question for people. Leaving aside the equity market level, when do corporate earnings return to healthy levels? How long do those curve take to come back to normal? And how does that feed into the companies who are running quite high leverage at the moment?

Dan Barnes So, of course, this is a health crisis and an economic crisis. But we’ve had other events, obviously, the US election was a major market event this year. Karim, were ETFs used to position going into the run up? And in the aftermath of the results, where did you notice increased activity?

Karim Chedid I think the US election served as a great case study of how ETFs can be used on the tactical positioning level going into an event like that; to play semantics, to put a sector implementation around the event. So the answer is yes, both in the run up and in the aftermath. In the run up, it was very clear in sector ETFs, especially US sector ETFs, we saw a jump of about three times in trading volumes in the run up to the election, which shows they were go to instruments to trade ahead of the event. There were some key themes coming up, more on the defensive side, I would say, like health care. But in the aftermath of the election we also saw some of the more quality names like in the technology sector really coming through. We even saw flows into areas like EM debt ETFs, and into sustainable.

Matthew Riley Something that’s interesting and more of a tactical environment like the election, is people buying puts, just because they don’t want to be forced into making a decision. They might not want to make options, but spreads around those kind of events can be very useful for end users to protect their risk profile.

Deborah Fuhr And do you think that 2021 will actually be the year that value outperforms?

Karim Chedid That’s the crystal ball question. I think there are signs that there’s some revival coming through. First of all, you have inflation starting to come through, and I mean, inflation definitely divides opinions. But if for anything, then it’s for the base effect. Inflation is starting from a very low level after the shock of 2020, it’s got to come through in 2021 and that type of environment tends to be supportive for the value factor. But then also fiscal stimulus. What we do know after the pandemic is that its kick-started this coordination between fiscal and monetary stimulus, which is in theory inflationary. A lot of it relies on how much economic activity comes back online, because you need the stimulus to be a surplus on top of the recovering lost activity, and also supportive for even stronger rebound. But there is hope for a value revival.

Deborah Fuhr This year has been a great year for ETFs investing into gold. The record flows compared to a number of prior years. What is your outlook for gold and silver for 2021?

Karim Chedid Sure. I know we look at gold and silver together, but there are some differences in the investment thesis. There fx silver has some industrial uses that gold does not. So gold tends to trade a lot more, purely as a safe haven, precious metal. Where silver is a bit more of a combo, so it tends to trade with a lag to gold, but sometimes has even higher beta. I think both have a case in portfolios in 2021. The rally in gold may have run a bit out of steam and it may look a little bit topic. Some of the safe haven drives are moderating a little bit with some of the uncertainties removed like the US election is now behind us. The pandemic, we have a bit of an end in sight, which is bringing a bit of relief to sentiment. Having said all that, rates are even lower and real rates are negative and the opportunity cost to hold gold is basically non-existent and then gold is an inflation hedge. So if that inflation theme that I’m talking about comes through, you want to own gold and gold is still a good source of diversification in portfolios vs equities and bonds. And we do know the environment remains challenging. So you want to have that diversification of assets

Dan Barnes That’s really interesting. Matthew and Karim, thank you both very much.

Karim Chedid Thank you.

Dan Barnes I’d like to thank Karim, Matthew and Deborah for their insights today and, of course, you for watching. To catch up on our other shows or to subscribe to our newsletter go to ETFTV.NET or TRADERTV.NET.

Published on December 3, 2020