Implementing VanEck’s Macro Views in Your Portfolio
August 16, 2024
Read Time 7 MIN
CEO Jan van Eck recently shared his outlook on the markets from a macro perspective. Jan’s outlook pieces are always nuanced and timely, and in my conversations with clients, I know that many advisors appreciate his insights. That said, a response I often encounter when I share Jan’s outlook is: this is really interesting, but how do I implement these views in my portfolio?
Here’s the punchline for today’s markets: We believe advisors should diversify due to U.S. equity market distortions, stay short on fixed income while selectively adding duration for a barbell approach, and look to commodities and select emerging markets as global growth picks up.
Below we explore these three points in more detail and share how advisors can make these allocations using VanEck’s product suite.
Takeaway 1: U.S. equity market remains highly distorted. Avoid over-exposure to mega-caps.
Although the S&P 500 Index had an impressive 15.5% rally through the first half of 2024, this rise was notably distorted. When we compare the performance of large-cap growth vs. value stocks, we see that growth outperformance mirrors the levels seen during the so-called internet bubble of 1999. Following the 1999 peak in growth stocks, the Nasdaq 100 Index fell in the 2000-2007 period. The tech boom leading up to 2000 shows performance patterns remarkably similar to current market trends.
Growth/Value Distortion Reaches Internet Bubble Levels
Source: Morningstar. Data as of July 17, 2024. Past performance is not a guarantee of future results. Index performance is not illustrative of fund performance. It is not possible to invest in an index. Value represented by Russell 1000 Value Index. Growth represented by Russell 1000 Growth Index.
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Today’s tech giants are exhibiting more solid sales growth and profitability than during the 1999 internet bubble, and their high earnings helped drive up their valuations. However, we note that there is a difference between high growth companies and high ROIC (return on invested capital)1 companies. High absolute growth levels tend to mean revert over time. In periods where above-average growth is concentrated in a small handful of companies, capital tends to be over-allocated to chase high growth, which is based on short-term momentum and often unsustainable. Meanwhile, high ROIC companies are focused on sustainable growth and thoughtful allocation of capital aimed at protecting and growing market share over time.
We saw the risk of over-exposure to mega-caps play out in July’s tech sell-off, which may indicate the start of a market rotation into more value-oriented stocks.
How to invest: We suggest advisors ensure that their equity portfolio is diversified and not overly concentrated in the S&P 500 market cap index. Consider including mid caps, small caps, and international stocks to spread risk and capture broader market opportunities. Rather than short-term growth prospects, we favor high ROIC companies that accrue value more consistently over time. This environment is also a good reminder for advisors to make sure they are actively rebalancing their equity portfolios to avoid overexposure to overvalued growth stocks.
Related VanEck strategies:
- VanEck Morningstar Wide Moat ETF (MOAT): Focuses on quality companies with sustainable competitive advantages that are also trading at attractive prices relative to Morningstar’s fair value estimate. This approach results in a slight value bias that may give MOAT a contrarian edge considering current market dynamics. Morningstar research analysts, in the process of identifying wide moat companies, tend to focus on high ROIC companies that prioritize long-term growth.
- VanEck Morningstar SMID Moat ETF (SMOT): Offers diversification from large-caps by investing in small- and mid-cap companies, using the same moat investing strategy of targeting companies with strong economic moats and attractive valuations. Assuming growth doesn’t slow meaningfully, we believe small and mid caps may benefit from the lower rates and improved earnings momentum. SMOT can help mitigate exposure to companies with negative earnings and weak fundamentals.
Takeaway 2: Fiscal and monetary environment calls for barbell approach to fixed income
While the presidential election is still several months away, I get no shortage of questions from advisors about our views on geopolitical risk and how the outcome of the election is likely to impact markets. Advisors likely face these same questions from their clients.
Regardless of who wins, government spending levels are currently very high, and addressing this issue will likely become a priority after the presidential election. The Trump and Biden administrations have been large spenders, creating a budget deficit of 7% despite being in an economic boom with low unemployment. Looming Medicare and Social Security deficits make 2025 a critical year for fiscal policy.
This may contribute to the Fed’s hesitation to cut interest rates in the aftermath of pandemic-related spending and monetary policies. A significant drop in interest rates is unlikely unless a severe economic contraction occurs. Our view is that the government will need to employ a combination of tax increases and spending cuts to manage the debt, while the Fed may opt to cut rates to stimulate that. Though not necessarily negative for stocks and bonds, there is a risk of 10-year interest rates spiking if these fiscal challenges are not adequately addressed.
How to invest: Given the high interest rates on short-term fixed income, we are encouraging advisors to adopt a barbell approach to fixed income. With 4-6 interest rate cuts priced into the market in the next year, capturing yield through collateralized loan obligations (CLOs) and floating rate notes may make sense over nominal treasuries, but selectively adding some duration also makes sense in the near-medium term. As high yield spreads widen, bank loan investors may want to consider a rotation into longer duration high yield corporate bonds, particularly higher quality ones. This barbell strategy balances the benefits of short-term yield with potential opportunities in longer-term investments.
Related VanEck strategies:
- VanEck CLO ETF (CLOI): Actively managed by PineBridge Investments and dynamically allocates to investment grade collateralized loan obligations (CLOs), offering exposure to floating-rate assets and investments with built-in risk protection. We believe CLOs have a place in investors’ core bond portfolios.
- VanEck IG Floating Rate ETF (FLTR): Provides access to investment-grade floating rate notes, helping to mitigate interest rate risk while maintaining yield potential.
- VanEck Fallen Angel High Yield Bond (ANGL): Offers exposure to high yield bonds originally issued as investment grade corporate bonds. Fallen angel bonds have historically had a higher average credit quality than the broad high yield universe.2
Takeaway 3: Capitalize on global growth with commodities and select emerging markets.
There has been a noticeable uptick in global growth, which has positive implications for various sectors, including commodities. The U.S. is growing at a slower pace, but growth engines like India have been growing rapidly.
How to invest: With global growth picking up, commodities are likely to benefit, making them a viable addition to a diversified investment strategy. Our discussions with clients have been focusing on the longer term structural forces that are coming together. These include low capital expenditures and investments in new discoveries as well as a trend towards onshoring and nearshoring, which is influenced by structural demand for clean energy, grid and infrastructure upgrades, and new sources such as crypto mining and AI demand. In addition, we have written extensively on the strong growth prospects of India, as the country’s rapid digitization, thriving equity market and demographic trends are creating compelling investment opportunities that we believe investors should be exploring.
Related VanEck strategies:
- VanEck India Growth Leaders ETF (GLIN): Focuses on fundamentally sound Indian companies that exhibit attractive growth potential at a reasonable price.
- VanEck Digital India ETF (DGIN): Provides access to companies involved in supporting the digitization of the Indian economy.
- VanEck Natural Resources ETF (HAP): Offers exposure to global natural resources companies involved in activities related to a broad spectrum of raw materials and commodities, including metals, energy sources, and agricultural products.
- VanEck CMCI Commodity Strategy ETF (CMCI) and VanEck CM Commodity Index Fund: Passively managed strategies tracking the UBS Constant Maturity Commodity Index and investing in commodity-linked derivative instruments and more conservative fixed income securities, such as short-term U.S. treasuries.
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PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
IMPORTANT DISCLOSURES
1 Return on invested capital is a performance ratio that aims to measure the percentage return that a company earns on invested capital and shows how efficiently a company uses funds to generate income.
2 When comparing ICE US Fallen Angel High Yield 10% Constrained Index and ICE BofA US High Yield Index. ICE BofA rating is a proprietary composite of various rating agencies.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Index definitions:
S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector.
Russell 1000 Value Index consists of value-oriented U.S. companies selected from the large-cap focused Russell 1000 Index.
Russell 1000 Growth Index consists of growth-oriented U.S. companies selected from the large-cap focused Russell 1000 Index.
Nasdaq 100 Index comprises equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
UBS Constant Maturity Commodity Total Return Index represents a basket of commodity futures contracts of 29 commodity components.
ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, Index) is a subset of the ICE BofA US High Yield Index (H0A0, Broad Index) and includes securities that were rated investment grade at time of issuance.
ICE BofA US High Yield Index (H0A0, Broad Index) is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
The principal risks of investing in VanEck ETFs and mutual funds include sector, market, economic, political, foreign currency, world event, index tracking, active management, social media analytics, derivatives, blockchain, commodities and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. VanEck ETFs may also be subject to authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares risks. VanEck ETFs or mutual funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs or mutual funds that invest in high-yield securities are subject to subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. ETFs or mutual funds that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund’s specific risks.
An investment in a Collateralized Loan Obligation (CLO) may be subject to risks which include, among others, debt securities, LIBOR Replacement, foreign currency, foreign securities, investment focus, newly-issued securities, extended settlement, management, derivatives, cash transactions, market, operational, trading issues, and non-diversified risks. CLOs may also be subject to liquidity, interest rate, floating rate obligations, credit, call, extension, high yield securities, income, valuation, privately-issued securities, covenant lite loans, default of the underlying asset and CLO manager risks, all of which may adversely affect the value of the investment.
There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Please call 800.826.2333 or visit vaneck.com for a free prospectus and summary prospectus. An investor should consider the investment objective, risks, and charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information about the investment company. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.
PMI – Purchasing Managers’ Index: economic indicators derived from monthly surveys of private sector companies. A reading above 50 indicates expansion, and a reading below 50 indicates contraction; ISM – Institute for Supply Management PMI: ISM releases an index based on more than 400 purchasing and supply managers surveys; both in the manufacturing and non-manufacturing industries; CPI – Consumer Price Index: an index of the variation in prices paid by typical consumers for retail goods and other items; PPI – Producer Price Index: a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time; PCE inflation – Personal Consumption Expenditures Price Index: one measure of U.S. inflation, tracking the change in prices of goods and services purchased by consumers throughout the economy; MSCI – Morgan Stanley Capital International: an American provider of equity, fixed income, hedge fund stock market indexes, and equity portfolio analysis tools; VIX – CBOE Volatility Index: an index created by the Chicago Board Options Exchange (CBOE), which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities on S&P 500 index options.; GBI-EM – JP Morgan’s Government Bond Index – Emerging Markets: comprehensive emerging market debt benchmarks that track local currency bonds issued by Emerging market governments; EMBI – JP Morgan’s Emerging Market Bond Index: JP Morgan's index of dollar-denominated sovereign bonds issued by a selection of emerging market countries; EMBIG - JP Morgan’s Emerging Market Bond Index Global: tracks total returns for traded external debt instruments in emerging markets.
The information presented does not involve the rendering of personalized investment, financial, legal, or tax advice. This is not an offer to buy or sell, or a solicitation of any offer to buy or sell any of the securities mentioned herein. Certain statements contained herein may constitute projections, forecasts and other forward looking statements, which do not reflect actual results. Certain information may be provided by third-party sources and, although believed to be reliable, it has not been independently verified and its accuracy or completeness cannot be guaranteed. Any opinions, projections, forecasts, and forward-looking statements presented herein are valid as the date of this communication and are subject to change. The information herein represents the opinion of the author(s), but not necessarily those of VanEck.
Investing in international markets carries risks such as currency fluctuation, regulatory risks, economic and political instability. Emerging markets involve heightened risks related to the same factors as well as increased volatility, lower trading volume, and less liquidity. Emerging markets can have greater custodial and operational risks, and less developed legal and accounting systems than developed markets.
All investing is subject to risk, including the possible loss of the money you invest. As with any investment strategy, there is no guarantee that investment objectives will be met and investors may lose money. Diversification does not ensure a profit or protect against a loss in a declining market. Past performance is no guarantee of future performance.
IMPORTANT DISCLOSURES
1 Return on invested capital is a performance ratio that aims to measure the percentage return that a company earns on invested capital and shows how efficiently a company uses funds to generate income.
2 When comparing ICE US Fallen Angel High Yield 10% Constrained Index and ICE BofA US High Yield Index. ICE BofA rating is a proprietary composite of various rating agencies.
This is not an offer to buy or sell, or a recommendation to buy or sell any of the securities, financial instruments or digital assets mentioned herein. The information presented does not involve the rendering of personalized investment, financial, legal, tax advice, or any call to action. Certain statements contained herein may constitute projections, forecasts and other forward-looking statements, which do not reflect actual results, are for illustrative purposes only, are valid as of the date of this communication, and are subject to change without notice. Actual future performance of any assets or industries mentioned are unknown. Information provided by third party sources are believed to be reliable and have not been independently verified for accuracy or completeness and cannot be guaranteed. VanEck does not guarantee the accuracy of third party data. The information herein represents the opinion of the author(s), but not necessarily those of VanEck or its other employees.
Index definitions:
S&P 500 Index consists of 500 widely held common stocks covering industrial, utility, financial and transportation sector.
Russell 1000 Value Index consists of value-oriented U.S. companies selected from the large-cap focused Russell 1000 Index.
Russell 1000 Growth Index consists of growth-oriented U.S. companies selected from the large-cap focused Russell 1000 Index.
Nasdaq 100 Index comprises equity securities issued by 100 of the largest non-financial companies listed on the Nasdaq stock exchange.
UBS Constant Maturity Commodity Total Return Index represents a basket of commodity futures contracts of 29 commodity components.
ICE US Fallen Angel High Yield 10% Constrained Index (H0CF, Index) is a subset of the ICE BofA US High Yield Index (H0A0, Broad Index) and includes securities that were rated investment grade at time of issuance.
ICE BofA US High Yield Index (H0A0, Broad Index) is comprised of below-investment grade corporate bonds (based on an average of various rating agencies) denominated in U.S. dollars.
An investor cannot invest directly in an index. Returns reflect past performance and do not guarantee future results. Results reflect the reinvestment of dividends and capital gains, if any. Certain indices may take into account withholding taxes. Index returns do not represent Fund returns. The Index does not charge management fees or brokerage expenses, nor does the Index lend securities, and no revenues from securities lending were added to the performance shown.
ICE Data Indices, LLC and its affiliates (“ICE Data”) indices and related information, the name "ICE Data", and related trademarks, are intellectual property licensed from ICE Data, and may not be copied, used, or distributed without ICE Data's prior written approval. The licensee's products have not been passed on as to their legality or suitability, and are not regulated, issued, endorsed, sold, guaranteed, or promoted by ICE Data. ICE Data MAKES NO WARRANTIES AND BEARS NO LIABILITY WITH RESPECT TO THE INDICES, ANY RELATED INFORMATION, ITS TRADEMARKS, OR THE PRODUCT(S) (INCLUDING WITHOUT LIMITATION, THEIR QUALITY, ACCURACY, SUITABILITY AND/OR COMPLETENESS).
The principal risks of investing in VanEck ETFs and mutual funds include sector, market, economic, political, foreign currency, world event, index tracking, active management, social media analytics, derivatives, blockchain, commodities and non-diversification risks, as well as fluctuations in net asset value and the risks associated with investing in less developed capital markets. VanEck ETFs may also be subject to authorized participant concentration, no guarantee of active trading market, trading issues, passive management, fund shares trading, premium/discount risk and liquidity of fund shares risks. VanEck ETFs or mutual funds may loan their securities, which may subject them to additional credit and counterparty risk. ETFs or mutual funds that invest in high-yield securities are subject to subject to risks associated with investing in high-yield securities; which include a greater risk of loss of income and principal than funds holding higher-rated securities; concentration risk; credit risk; hedging risk; interest rate risk; and short sale risk. ETFs or mutual funds that invest in companies with small capitalizations are subject to elevated risks, which include, among others, greater volatility, lower trading volume and less liquidity than larger companies. Please see the prospectus of each Fund for more complete information regarding each Fund’s specific risks.
An investment in a Collateralized Loan Obligation (CLO) may be subject to risks which include, among others, debt securities, LIBOR Replacement, foreign currency, foreign securities, investment focus, newly-issued securities, extended settlement, management, derivatives, cash transactions, market, operational, trading issues, and non-diversified risks. CLOs may also be subject to liquidity, interest rate, floating rate obligations, credit, call, extension, high yield securities, income, valuation, privately-issued securities, covenant lite loans, default of the underlying asset and CLO manager risks, all of which may adversely affect the value of the investment.
There are inherent risks with equity investing. These risks include, but are not limited to stock market, manager, or investment style. Stock markets tend to move in cycles, with periods of rising prices and periods of falling prices.
There are inherent risks with fixed income investing. These risks may include interest rate, call, credit, market, inflation, government policy, liquidity, or junk bond. When interest rates rise, bond prices fall. This risk is heightened with investments in longer duration fixed-income securities and during periods when prevailing interest rates are low or negative.
Please call 800.826.2333 or visit vaneck.com for a free prospectus and summary prospectus. An investor should consider the investment objective, risks, and charges and expenses of the investment company carefully before investing. The prospectus and summary prospectus contain this and other information about the investment company. Please read the prospectus and summary prospectus carefully before investing.
© Van Eck Securities Corporation, Distributor, a wholly owned subsidiary of Van Eck Associates Corporation.