ETF Spotlight: Smart moves in a risky market

The Street

Marissa Ansell, Head of ETF Investment Strategy at Goldman Sachs Asset Management, joins to discuss.

Transcript

00:00Joining me now, Marissa Ansell, Head of ETF Investment Strategy at Goldman Sachs Asset Management.

00:05Marissa, thanks so much for being here.

00:07Thanks for having me.

00:08So, Marissa, with stocks at all-time highs for, what, the 30-plus times this year,

00:14how should investors be thinking about risk versus opportunity?

00:17Is now the time to still be risk-on, or is it time to start being a bit more cautious?

00:22It's a great question, and it's a great point.

00:24I would categorize our market outlook as constructive but risk-aware.

00:30And what I mean by that is economic growth is slowing, but it's still resilient.

00:35Monetary policy is accommodative, so together they would support risk-on sentiment.

00:41However, valuations, as you mentioned, are still elevated.

00:44Uncertainty is still high.

00:46And so I think it makes sense for investors to focus on diversification within their portfolios,

00:51both across asset classes and also within asset classes,

00:55and also employ hedging strategies selectively.

01:00to help protect against any potential market drawdown.

01:03Okay, so let's talk about building this risk-aware portfolio.

01:07For those people who maybe are sitting in cash right now or in money markets,

01:11what's one step that they can take with maybe not being too risky?

01:16Right.

01:17Yeah, I think to the extent that investors have any exposure to cash or to money market funds

01:23in their portfolios, an easy thing that they can do, particularly if they don't need access

01:27to those funds for the next six months or so, let's say they're saving for next year's

01:32family vacation or something like that, is just sort of take one step out into ultra-short

01:36duration bond strategies.

01:38So, things like GSST, which is our ultra-short bond ETF, or GUMI, which is our ultra-short municipal

01:46income ETF, those are both great ways for investors to pick up 30 to 40 basis points of incremental

01:52yield, lock in those higher yields, without taking significantly additional risk.

01:57Okay, so that's on the fixed income side.

02:00And then turning to stocks, when I think of playing it safe, I think often what comes

02:05to mind are, you know, income opportunities, dividend plays.

02:09So, how can someone generate some steady cash flow while also investing in stocks?

02:15Yeah, so, you know, what we're hearing from our clients right now is they really want income.

02:18They want to increase their income in their portfolios.

02:20And I think it's for a couple of reasons.

02:22It can either be to supplement, you know, regular sources of income.

02:25It could also be as an additional, more diversified source of potential excess return.

02:30But I think, you know, there is a bit of a conundrum facing investors right now, as you

02:34said, right?

02:34Because equity market valuations, actually, they just hit, the S&P just hit its 31st all-time

02:40high of the year on Friday.

02:43So, equity market valuations are elevated.

02:45At the same time, we've got, you know, the Fed cutting rates, which is bringing down yields

02:49in traditional fixed income investments.

02:51So, putting that together, you know, it's tough for investors to figure out kind of where

02:55to go for their income needs.

02:57And I think this is actually one of the reasons why derivative income ETFs like GPIX, GPIQ,

03:03which are our S&P 500 and NASDAQ 100 derivative income ETFs, have been so hugely popular this

03:10year because they help investors solve for a couple of potential challenges.

03:14One, they provide equity market exposure, but at the same time, it's exposure that is

03:19a little bit lower beta, lower volatility than, you know, regular equity market holdings.

03:26So, quite ideal for the current market environment.

03:29But at the same time, they are paying out consistent, high, attractive, you know, monthly

03:34distributions to help investors meet those income needs.

03:37And I think it used to be the case that some of the slow and steady income opportunities were

03:42not the growth stocks.

03:43It was more of the utilities and staples and financials.

03:46But taking a look at some of your biggest holdings in GPIX, NVIDIA, Microsoft, Apple,

03:51Amazon, Broadcom, Meta, Alphabet, Tesla.

03:53So, you get exposure to all the big tech, to the growthy names while also generating income.

03:59Yeah, that's exactly right.

04:00It's almost the best of both worlds, right?

04:01Because as you said, traditionally, the higher yielding sectors in the equity market are

04:06the lower growing ones, you know, historically.

04:09But actually, this is a way with GPIX, GPI-Q, other derivative income ETFs to get exposure

04:15both to, you know, the higher growth, often, you know, tech in the case of GPI-Q, the tech

04:21sectors and the higher growth sectors.

04:23But at the same time, because we use a call writing overlay to help generate income, it

04:28helps investors, you know, meet those income needs.

04:31And GPIX, GPI-Q are paying out, you know, annualized monthly distributions of 8.5% and

04:3610.5% consistently.

04:38So, you know, our clients really like those.

04:40We've also seen a broadening out of the rally.

04:43It's not just some of the big tech names that have been driving this market higher.

04:47We've seen small cap participation.

04:49The Russell's up, what, 10%, 11% year to date.

04:53What role should small caps play in people's portfolios right now, given the fact that the

04:58Fed is in now rate-cutting cycle?

05:02Yes, I think small caps have really been playing a bit of a waiting game this year, waiting

05:07for the Fed to start lowering rates.

05:09And of course, that's now started to happen.

05:11We're on a rate-lowering cycle.

05:14And so, you know, I think that's a really nice tailwind for small caps overall as an asset

05:18class.

05:19But in addition to that, I would say there are some fundamental reasons that we actually

05:22think that the setup for small caps is really nice from here.

05:25Number one, fundamentals remain really solid.

05:28So small caps are expected to grow their earnings by 30% next year, vis-à-vis 10% for large

05:34caps.

05:34Number two, M&A and IPO volume has picked up really materially.

05:39So M&A volume is up more than 30% year on year.

05:44And the number of IPOs is actually up more than 50% vis-à-vis the same period last year.

05:49So that's a really nice catalyst for smaller caps.

05:52And then third, and kind of the real, you know, kicker, is that actually valuations are

05:56still really, really attractive in our view in the small cap space.

06:00And so the medium small cap company is trading at about a 25% discount still to its large

06:05cap counterparts.

06:07And so putting all of that together, you know, ETFs like GSC, which is our actively managed

06:12small cap equity ETF, can actually be a really neat way for clients to, you know, start to

06:17put capital to work in this space.

06:19And we think it's a great return potential, but also a great diversifier for client portfolios.

06:25Yeah, we've certainly seen that IPO boom happen here at the New York Stock Exchange.

06:29My only question would be, though, if the Fed is cutting interest rates because of economic

06:34weakness or because there potentially could be a recession on the horizon, wouldn't that

06:39make small caps vulnerable?

06:41And how should you factor that into your portfolio construction?

06:45It's a great point.

06:46Actually, right now what we're seeing is a little bit of a Goldilocks-like scenario because

06:51we've got the Fed starting to bring down rates.

06:54But at the same time, as I mentioned, economic growth is still resilient.

06:58And so that is actually a really nice setup for small caps and for risk assets in general

07:02because, you know, rates are coming down, which is a nice tailwind.

07:05But at the same time, you know, we're not going into a recessionary-like scenario.

07:10OK, so just final thoughts, final advice to investors who are ready to be a bit more

07:15risk aware.

07:17Yeah, I would say, you know, I think all of the things that we've just talked about are

07:21great things that investors can do in their portfolios.

07:23They're very simple things.

07:24You know, number one, step out of cash.

07:26So stepping out of kind of cash and money market funds, just one step out into ultra short

07:30duration strategies.

07:32Number two, focus on income.

07:33It's a great, you know, additional source of potential return in portfolios.

07:36And don't forget the equity market that's often overlooked as a potential source of income.

07:42And then number three, as we said, consider small caps.

07:44I think the time is really good to consider putting some capital to work in small caps.

07:49We'll leave it there.

07:50Marissa, thank you so much for sharing your insights.

07:52Thanks for having me.

07:53That's Marissa Ansell, head of ETF investment strategy at Goldman Sachs Asset Management.

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