On the most recent episode of ETF Prime, VettaFi’s chairman Tom Lydon discussed recent advisor polling data on everything from 60/40 portfolio returns to active ETFs with host Nate Geraci. Later in the episode, Sprott’s John Ciampaglia highlighted their lineup of energy transition ETFs, including the Sprott Nickel Miners ETF (NIKL ), the first ETF to focus on nickel miners. Plus, Horizon’s Scott Ladner explained the process behind their ETF-centric, goals-based model portfolios.
A Moderate Recession
Lydon recently moderated a panel of financial advisors at the PIMCO ETF Summit, where he managed to glean some insight into how advisors are thinking about markets and the economy. During the session, Lydon was able to get attendees to share “what they were feeling about what the next 12 months might bring.”
And what the advisors from the audience shared “correlated very heavily with the data that [VettaFi] got from the webcast surveys and polling questions,” which showed that 58% of respondents expect the U.S. economy to be in a moderate recession by the end of 2023, while only 10% foresee a deep recession.
“Most advisors at this point, whether it’s from the polling questions or in person, feel that we’ll have a moderate recession, technically, but it will come in; and the Fed for the most part is doing a decent job,” Lydon said, adding that “the transparency and the open communication” from the Fed during their monetary tightening “has taken off some of the fear.”
This, combined with equity markets “bouncing back off of the October lows,” and the Fed “chipping away at inflation,” is leading financial advisors to believe that the economy may face “a little bit of a recession, but it’s not going to be as bad as people thought maybe three months ago,” according to Lydon.
A Lot of Handholding
According to VettaFi’s advisor polling data, 48% of financial advisors said that rising rates was their biggest concern with the fixed income market for the next six to 12 months, which Geraci suggested speaks to concerns about a potential policy error by the Fed.
Lydon said that while advisors are “concerned about rising rates now,” he noted that if you asked them how they feel about 12 months from now, “most feel that rates will be lower… Because at that point in time, the Fed’s applied the medicine, the medicine’s working, inflation’s under control, and we’re not in a painful recession.”
So, while investors may feel “a little bit more pain between now and 12 months from now with rising rates,” Lydon added that it’s important to remember that 2022 was “the worst year in 40 years for equities and fixed income,” so “there’s a lot of handholding that has to be done” with advisors’ clients.
“At the same time, although you’re optimistic about rebounds, it may take a little bit, especially in the fixed income side, to get back to stability.”
Fortunately, Lydon said that “fixed income is actually paying something these days.”
Yield Today, Gone Tomorrow
Results from a VettaFi survey also show that the majority of respondents are not bullish about the standard 60/40 portfolio, with 51% saying they expect such a portfolio to deliver lower returns over the next 10 years.
Coming off of 30 years of a great bull market and low interest rates, this didn’t surprise Lydon. “Getting 5% yield in fixed income right now is awesome,” he said. “However, the question is, is that going to be available a year from now? Most advisors don’t feel it will be.”
“So, they’re going to try to lock in yields at those levels in the next six months, because they don’t feel that those yields will be available 12 months from now,” Lydon added.
A Huge Amount of Money in Transition
Despite 46% of advisors saying they’re concerned about rising rates, 50% said they plan to add duration to their clients’ portfolios over the next six months.
“We are at a pivotal point,” Lydon said about this data point. “There’s a huge amount of money that’s in transition right now.”
Lydon explained that over the last couple of years, “most advisors had less confidence in the 60/40 allocation.” So, they deconstructed their fixed income allocations, sought alternatives, and put money in either cash or short duration. But now, with rates up to more attractive levels, advisors are “feeling more confident in the 60/40” while “feeling fairly confident that these yields won’t be available a year or two from now.”
“So, they are going longer duration and trying to grab that yield,” he said.
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