Ona day when US interest rates are set to rise and quantitative easing end, Citigroup has issued some suggestions about how an ETF-based portfolio might look to offset some of the impacts of an economic downturn.
If a recession is coming, the US bank reckons it will be mid-to-late 2023 before it is full-blown but notes investors have already started to price in the prospect.
“Our perspective is that an equity model portfolio designed for recession risk considerations should lead with Min Vol and some broader quality ETFs for core positioning. “
Min Vol here is minimum volatility or ETFs that are uncorrelated with the broader market movements (beta) as much as anything can be.
“Min Vol factor outperformance is notable during previous periods of declining economic activity,” it says.
“Thus, an ETF portfolio designed for recession risk can consider Min Vol products for a portion of core positioning”,
Utilities, dividends and other income strategies carry a high correlation to the Min Vol factor and provide compelling downside betas, while property, infrastructure and several country ETFs are other options, said the bank.
iShares MSCI Global Min Vol, iShares Global Consumer Staples and iShares Global Utilities are top of the bank's global ETF list on this basis.
Citi also likes a ‘quality’ for the satellite or non-core part of the portfolio, with similar features that correlate to Min Vol and 'extend the ETF opportunity set for recession positioning'.
Health Care, Multi-Factor and ESG also score well say the bank, especially in the US.
Among Global ETFs, "Health Care, Switzerland, Precious Metal Miners and even the water theme show decent correlations onboth Quality and Min Vol. though most ETFs in this screen fit better as satellite positions", it says.
in conclusion, Citigroup says: “The high-level takeaways are essentially twofold. First, the inherent defensive attributes of Min/Low Vol (minimum volatility) stand out for obvious reasons.
“Second, Quality factor characteristics look attractive and are available in several forms, such as more focused factor exposures, Health Care and Dividends. Each can make for good satellite positioning.
“Beyond that, in a global context, there are also interesting opportunities in uncorrelated assets, such as Precious Metals Miners, and specific Country ETFs.”