By: BlackRock Canada

High inflation and aggressive monetary tightening have roiled financial markets this year. “To say the least, there is a lot going on,” says Gargi Chaudhuri, Head of iShares Investment Strategy Americas at BlackRock. “Economies everywhere are facing the challenge of higher inflation and higher interest rates in a slowing growth environment.”

One way investors are responding to this is by increasing use of exchange-traded funds (ETFs) in their portfolios, to help manage volatility and capture opportunities in this period of market turmoil. “We’ve definitely seen increased adoption of ETFs across all client segments,” says Helen Hayes, Head of iShares Canada, “not only from a retail perspective, but also among pensions, asset managers and family offices,” she adds. “In fact, as of the end of September, the Canadian ETF industry overall marked organic growth of 7.2% this year[1].”


Helen Hayes
Head of iShares Canada, BlackRock

In a study of institutional investors worldwide at the beginning of the year, it was found that 43% of North American institutional investors are more likely to increase their use of ETFs over the next 18 months[2]. “We’ve seen institutional investors continue to use ETFs for a range of both tactical and strategic purposes, from low-cost building blocks in portfolio construction to alternative uses,” shares Hayes “For instance, we’re seeing clients use ETFs as a complement to derivative strategies or implementing factor investing using ETFs.” Hayes also explains that in difficult market conditions, ETF liquidity is a key benefit. This is especially the case in fixed income, “every time we’ve seen increased volatility across global markets, we’ve also seen increased strategic liquidity management from a fixed income perspective,” says Hayes. On a more positive note, Hayes explains, institutional investors are also taking advantage of the diverse lineup of ETFs in both stocks and bonds for tactical allocations to specific market segments or geographies.

In Chaudhuri’s view, macro factors – higher inflation, rising discount rates and geopolitical uncertainty – are increasing the likelihood of an economic downturn in Canada and elsewhere. That would clearly impact corporate earnings to an extent that may not yet be fully priced into equity valuations, Chaudhuri adds, and she expects continued volatility in stocks at least until central banks pause their tightening cycle. As a result, “we remain generally defensive on the equity side,” she says.

Given the challenges, Chaudhuri recommends investors consider equity exposures that can help mitigate volatility and focus on quality. Two options to consider: iShares MSCI Min Vol USA Index ETF (XMU), which offers lower-beta exposures to high-quality equities, and iShares Core MSCI Quality Dividend Index ETF (XDU), which tracks a portfolio of U.S. stocks with strong financials, above-average dividend yields and steady or increasing dividends.


Gargi Chaudhuri
Head of iShares Investment Strategy Americas, BlackRock

Chaudhuri adds, however, that investors might find alpha-generating opportunities in commodities equities, particularly in energy and agriculture. The disruptions to global food and energy supply chains partly due to geopolitical tensions, and future production increases are limited by a history of under-investment – two factors that may support prices and corporate earnings going forward. With iShares Core S&P/TSX Capped Composite Index ETF (XIC), investors can gain broad exposure to the commodity-heavy Canadian market, while iShares S&P/TSX Capped Energy Index ETF (XEG) and iShares Global Agricultural Index ETF (COW) offer more targeted exposures.

While she suggests playing defense on equities, Chaudhuri says that bonds are a different story. In fact, yields have risen so much that fixed income now offers some attractive income generation. As well, bonds could provide ballast to equity allocations in case of a downturn, as they traditionally have. Meanwhile, Chaudhuri says macro forces suggest that higher inflation might persist over the short to medium term, making inflation-linked bonds attractive. “We think bonds now bring pockets of opportunity,” she explains, “and specifically short-term corporate bonds and the front end of the inflation-linked market.”

To express those views, investors could consider iShares Core Canadian Short-Term Bond and Short-Term Corporate Bond Index ETFs (XSB and XSH), iShares 1-5 Year U.S. IG Corporate Bond Index ETF (CAD-Hedged) (XIGS), and iShares 0-5 Year TIPS Bond Index ETF (CAD-Hedged) (XSTH), which tracks inflation-indexed U.S. Treasuries with maturities of less than five years.

There is no doubt 2022 has been a challenging year for financial markets. Yet ETFs are helping institutional investors tap into the benefits of their low cost, liquidity, price discovery and the ability to take advantage of opportunities – in any market condition.

Visit BlackRock Canada for more insights and timely investment ideas.


[1] As of September 30, 2022. Source: BlackRock
[2] Institutional Investor study, Q1 2022: https://www.ishares.com/us/resources/institutional-investors/responding-to-uncertainty

Sponsored by


Disclaimers

iShares® ETFs are managed by BlackRock Asset Management Canada Limited or its affiliates.  Commissions, trailing commissions, management fees and expenses all may be associated with investing in iShares ETFs.  Please read the relevant prospectus before investing.  The funds are not guaranteed, their values change frequently and past performance may not be repeated.  Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional.

XAW, XCLR, XCSR, XDG, XDGH, XDIV, XDLR, XDSR, XDU, XDUH, XEC, XEF, XEH, XEM, XESG, XEU, XFA, XFC, XFF, XFI, XFS, XFH, XIN, XMI, XML, XMM, XMS, XMTM, XMU, XMV, XQLT, XSEA, XSEM, XSUS, XULR, XUSR, XMW, XMY, XVLU and XWD  are not sponsored, endorsed, sold or promoted by MSCI, and MSCI bears no liability with respect to any such funds or securities or any index on which such funds or securities are based.  The Prospectus contains a more detailed description of the limited relationship MSCI has with BlackRock Institutional Trust Company, N.A and any related funds.

Standard & Poor’s® and S&P® are registered trademarks of Standard & Poor’s Financial Services LLC (“S&P”). Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”). TSX is a registered trademark of TSX Inc. (“TSX”). All of the foregoing trademarks have been licensed to S&P Dow Jones Indices LLC and sublicensed for certain purposes to BlackRock Fund Advisors (“BFA”),  which in turn has sub-licensed these marks to its affiliate, BlackRock Asset Management Canada Limited (“BlackRock Canada”), on behalf of the applicable fund(s). The index is a product of S&P Dow Jones Indices LLC, and has been licensed for use by BFA and by extension, BlackRock Canada and the applicable fund(s). The funds are not sponsored, endorsed, sold or promoted by S&P Dow Jones Indices LLC, Dow Jones, S&P, any of their respective affiliates (collectively known as “S&P Dow Jones Indices”) or TSX, or any of their respective affiliates. Neither S&P Dow Jones Indices nor TSX make any representations regarding the advisability of investing in such funds.

Manulife Investment Management Limited  and Manulife Investment Management Limited  (Europe) Limited (collectively referred to as “Licensor”) makes no representation or warranty, express or implied, regarding the advisability of investing in securities generally or in the iShares Global Agriculture Index Fund and iShares Global Infrastructure Index Fund particularly or the ability of the Manulife Investment Management Global Agriculture Index and the Manulife Investment Management Global Infrastructure Index to track general market performance. Licensor’s only relationship to BlackRock Asset Management Canada Limited is the licensing of the indexes which is determined, composed and calculated by Licensor without regard to BlackRock Asset Management Canada Limited or the iShares Global Agriculture Index Fund and iShares Global Infrastructure Index Fund. Licensor has no obligation to take the needs of BlackRock Asset Management Canada Limited or the owners of the iShares Global Agriculture Index ETF and iShares Global Infrastructure Index ETF into consideration in determining, composing or calculating the Index. Licensor shall not be liable to any person for any error in the Index nor shall it be under any obligation to advise any person of any error therein.

XBB, XCB, XCH, XFR, XGB, XGGB, XHB, XLB, XQB, XRB, XSB, XSH XSQ and XSU (collectively, the “iShares ETFs”) are not in any way sponsored, endorsed, sold or promoted by the London Stock Exchange Group plc and its group undertakings (collectively, the “LSE Group).  The LSE Group does not accept any liability whatsoever to any person arising out of the use of the iShares Funds or the underlying data.

“FTSE®” “Russell® and “FTSE Russell®” are trademarks of the relevant LSE Group company and are used by any other LSE Group company under license.

The ETF is not sponsored, endorsed, sold or promoted by ICE Data Indices, LLC, nor does this company make any representation regarding the advisability of investing in the Funds. BlackRock is not affiliated with ICE Data Indices, LLC

Bloomberg®” and Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index, Bloomberg U.S. Treasury Inflation-Protected Securities (TIPS) 0-5 Years Index (CAD-Hedged), Bloomberg U.S. Aggregate Bond Index, Bloomberg U.S. Aggregate Bond Index (CAD-Hedged) and Bloomberg U.S. High-Yield Very Liquid Index (CAD Hedged) are service marks of Bloomberg Finance L.P. and its affiliates, including Bloomberg Index Services Limited (“BISL”), the administrator of the index (collectively, “Bloomberg”) and have been licensed for use for certain purposes by BlackRock. Bloomberg is not affiliated with BlackRock, and Bloomberg does not approve, endorse, review, or recommend XSTP, XSTP.U, XSTH, XAGH, XAGG, XAGG.U or CHB. Bloomberg does not guarantee the timeliness, accurateness, or completeness of any data or information relating to XSTP, XSTP.U, XSTH, XAGH, XAGG, XAGG.U or CHB.

© 2022 BlackRock Asset Management Canada Limited. All rights reserved. iSHARES and BLACKROCK are registered trademarks of BlackRock, Inc., or its subsidiaries in the United States and elsewhere. Used with permission.

MKTGH1122C/S-2570482-2/3