Mike Philbrick, chief executive officer, ReSolve Asset Management

FOCUS: Exchange-traded funds 

MARKET OUTLOOK:

Creating value in an era of inflation volatility:

Liquidity, growth and inflation greatly inform whether specific asset classes will thrive or wilt. The decade prior to 2022 was characterized by benign inflation, abundant liquidity and sustained economic growth. These qualities favoured traditional portfolios of stocks and bonds, further, the asset classes of “stocks” and “bonds” were uncorrelated. Bonds were a very effective hedge or complement to stocks and vice versa when held together in a portfolio.

2022 ushered in a new era of contrasting economic conditions. We are experiencing meaningful inflation globally, contracting liquidity and slowing economic growth. These conditions create overall economic uncertainty and market volatility. We are moving to an era of global competition driven by scarcity rather than abundance. These factors create large moves in interest rates, foreign exchange, commodities, stocks and bonds. Further, in this era, stocks and bonds become correlated and bonds are no longer an effective hedge to stocks in a portfolio. This dramatically increases the volatility of the traditional stock-bond portfolio and makes this portfolio far less reliable in creating an income stream for investors.

However, this volatility also creates many opportunities for active management as inflation volatility creates more pronounced winners and losses and that creates opportunities for active managers to make money. For example, having an allocation to a non-correlated strategy like Managed Futures this year made a significant difference. These managers have been able to produce significant alpha in 2022 for investors and it's a time when it really matters.

If investors are to succeed in the current economic regime simple diversification may not be enough. Investors should consider adding active strategies like Managed Futures to their portfolios as these strategies can capitalize on the opportunities created by volatility and tend to be non-correlated, thus they can add value to portfolios when it matters most.

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TOP PICKS:

iShares Core Canadian Short Term Bond Index ETF (XSB TSX)

It provides a low-cost, broad exposure to Canadian investment-grade bonds with maturities ranging from one to five years. It pays monthly cash distributions with low-interest rate risk due to the short-term nature of the maturities.  It’s holding are also “investment grade” providing low exposure to default risk.

iMGP DBi MANAGED FUTURES STRATEGY ETF (DBMF NYSEARCA)

The fund will employ long and short positions in derivatives, primarily futures contracts and forward contracts, across the broad asset classes of equities, fixed income, currencies and commodities. The fund targets pre-fee returns of the largest Commodity Trading Advisor Hedge Funds by assets and exposures are built through some of the most liquid US-based futures contracts.

Horizons Global Lithium Producers Index ETF (HLIT TSX)

It is the first Canadian-listed ETF focused exclusively on providing exposure to the global lithium market. Providing exposure to a commodity that benefits from increased demand for lithium-ion batteries, which are increasingly used in electric vehicles and electronic devices.

PAST PICKS: October 1, 2021

Horizons Global Uranium Index ETF (HURA TSX)

• Then: $23.53
• Now: $24.00
• Return: 2%
• Total Return: 3%

iShares MSCI Saudi Arabia ETF (KSA NYSEARCA)

• Then: $41.97
• Now: $40.47
• Return: -4%
• Total Return: -2%

3iQ CoinShares Ether ETF (ETHQ TSX)

• Then: $17.04
• Now: $6.40
• Return: -62%
• Total Return: -62%

Total Return Average: -20%