Trade war and China analysis ‘lacking nuance’

Senior manager at $11 billion AUM ETF provider tells WP that while markets were rocked on Monday, too few people are looking for solutions

Trade war and China analysis ‘lacking nuance’

Many investors have viewed the trade war turmoil too broadly without taking into account the complexities of the situation, according to a leading ETF provider.

Jay Jacobs, head of research and strategy at Global X ETFs, admitted that days like Monday, which saw the US indexes drop 3% after China allowed its currency to depreciate against the dollar to its lowest level in 11 years, will always impact the asset management world.

However, he believes the intricacies around which regions, sectors and countries are affected are being lost on investors, and that too few people are offering solutions.

For Global X ETFs, acquired last year by Mirae Asset Financial Group, which also owns Toronto-based Horizons ETFs, China forms a substantial part of its 68 passive product suite. It has 11 ETFs focused on different sectors in the country and a 12th that is a broad exposure to the top-50 Chinese companies.

Jacobs told WP: “Turmoil, broadly, is difficult, but we just think a lot of people have been way too broad and lacking nuance in how they are thinking about trade wars, which impact different regions and even sectors in China very differently.

“We are not just trying to ride through the bumps here, we are actually trying to educate people on how these trades are impacting different [elements] in different ways.”

Jacobs holds up the Chinese tech sector as an example of having some of the highest beta to trade war gyrations but pointed out that the consumer staple sector in China has actually fared well and been resilient.

He said: “We are trying to help provide solutions rather than being worried and trying to hide and avoid it. It’s a challenge because when you have uncertainty, especially with a more idiosyncratic uncertainty that’s affected by people, data is not helpful and it can really lock up portfolios.

“Investors often want to change their allocation to a more risk-averse investment like short-term bonds or precious metals – but that’s part of the challenge.

“We don’t think a lot of people are being pro-active in providing solutions. That’s an area where we are differentiated because we have a more nuanced way of thinking about this. It gives us an entry point into the conversation rather than just telling people to hang on.”

Global X ETFs was founded in 2008 and launched its first product in 2009 – a Colombian equity ETF, which was followed by a Norwegian equity ETF and some China sector funds. It has expanded and currently sits just shy of $11 billion in AUM.

Its offerings are now split into three areas: thematic growth, income and international. The former focuses on disruptive technologies and changing demographic and consumer behaviour, such as robotics and AI, fintech and cloud computing.

The provider has enjoyed a consistent chunk of Canadian money, tilted slightly towards commodity themed products that have a natural appeal to investors north of the border. For advisors, the Manhattan-based company also offers model portfolios – eight classic risk-based and three outcome-based - which Jacobs predicts will continue to grow in popularity.

He said: “As the advisory community continues to move towards a more fee-based business rather than brokerage, you see them moving more from trade ideas into a risk-based portfolios.

“Often, they would prefer to outsource that, focusing more on client and relationship management, and growing their business rather than trying to really spend a lot of time on the portfolio construction side. 

“Advisors can look at these model portfolios just for ideas and how to incorporate dividend stocks into a portfolio and how to incorporate disruptive themes. Or they can manage their portfolio to track it very closely and really leverage the full intellectual property behind it.”

Outsourcing is a growing space and one that reflects the changes advisors are going through right now regarding technology, demographic changes and the desire to show more of a human element to their service.

He said: “The baby boomer generation is retiring  and the swing generation is starting to pass along a lot of assets to the millennial generation, so there are a lot of changes happening under the surface of the advisor community.

“If we can help them through the introduction of these model portfolios which we think are well-suited - for example, equity income ones are well suited to retirees, thematic growth ones to millennials – then they can leverage that and focus on the human element and differentiate their practice.”