As market volatility and economic uncertainty test the nerves of investors, CI WisdomTree ETFs offer a core portfolio solution that has outperformed the benchmark
This article was produced in partnership with CI Global Asset Management.
As uncertainty swirls around the markets and economy, core portfolio holdings that led the way for the past decade are being questioned. Advisors don’t need reminding that past performance is no guarantee of future results, but times of change are discombobulating for the average investor.
As we head toward 2023, inflation is higher and central banks are tightening monetary policy amid weak economic growth. A recession appears increasingly likely. Many companies have responded with layoffs, while consumers are tightening their belts given the higher price of daily purchases. Investors are jittery about the markets because no one really knows what next year has in store or where they should be putting their money. The result is more volatility, which perpetuates the feeling of unease.
Given this environment, Jaron Liu, Director, ETF Strategy, CI Global Asset Management, believes there is a greater emphasis on companies that have solid fundamentals, sustainable earnings and enduring business models. And for those investors looking for diversified large-cap exposure with genuine growth potential, Liu said the CI WisdomTree suite of quality dividend growth index ETFs offer a compelling solution.
The CI WisdomTree U.S. Quality Dividend Growth Index ETF (DGR.B), CI WisdomTree International Quality Dividend Growth Index ETF (IQD.B), and the CI WisdomTree Canada Quality Dividend Growth Index ETF (DGRC) are multi-factor strategies that allow investors to focus on quality, a factor that has traditionally done well during periods of economic contraction.
Liu explained: “Quality companies tend to be characterized as having stronger balance sheets, more stable profitability and lower leverage. That makes them more resilient during periods of higher market volatility.”
Weeding out genuine quality
The CI WisdomTree suite has a unique methodology that considers only dividend-paying companies that have earnings yields greater than their dividend yield, ensuring they can afford to pay out dividends from what they earn through business operations. The funds then apply a quality and forward-looking growth screen featuring metrics such as return on equity, return on assets, and a three-to-five-year earnings growth estimate. This helps screen out highly leveraged companies at risk in the current economic climate.
Liu said: “This is important because we want to ensure that not only are these companies able to grow their earnings, but that the dividends they pay out are actually sustainable over the long term.”
The strategy also applies a weighting based on dividend streams which, combined with the quality and growth screen, prevents it from overweighting overvalued companies. This is central to its success as a lot of core positions within portfolios are often comprised of large-cap, broad-based index funds, which are often market-cap weighted. The CI WisdomTree offerings are designed to overcome this problem and prevent investors getting caught in pricing bubbles.
“An index fund that tracks the S&P 500 would have had nearly 25% alone in the FAANGM stocks at one point last year as well as an overweight to stocks such as Tesla and NVIDIA,” Liu said. “This certainly worked out well over the past decade when interest rates were lower but now that environment has changed, we're starting to see the market favour companies with a greater emphasis on profitability and stability of earnings.”
DGR.B, for example, traditionally has a much lower exposure to tech stocks compared to the benchmark and the tech it primarily holds includes the likes of Apple and Microsoft, which pay dividends and have a history of profitability. DGR.B outperformed the S&P 500 by more than 13% over the last year (as of October 9).
These ETFs are not just for volatile times like today, as CI GAM views them as long-term core holdings rather than simply a quick trade. They can help an advisor stay disciplined with respect to their client goals by guarding against some of the shortcomings of broad-based index investing.
Liu believes the role of advisors is more important than ever, with clients’ emotions currently running high and some tempted to time the market rather than stick to their investment plan.
“It's important to remind clients that down markets can also lead to different opportunities,” he said. “This might be an ideal time for anyone who wants to reconsider the core positions within their portfolio. And for those who might be looking to move towards a multi-factor approach, CI WisdomTree’s quality dividend growth suite is an excellent option.”
The opinions expressed in the communication are solely those of the author(s) and are not to be used or construed as investment advice or as an endorsement or recommendation of any entity or security discussed.
Commissions, management fees and expenses all may be associated with an investment in exchange-traded funds (ETFs). You will usually pay brokerage fees to your dealer if you purchase or sell units of an ETF on recognized Canadian exchanges. If the units are purchased or sold on these Canadian exchanges, investors may pay more than the current net asset value when buying units of the ETF and may receive less than the current net asset value when selling them. Please read the prospectus before investing. Important information about an exchange-traded fund is contained in its prospectus. ETFs are not guaranteed; their values change frequently, and past performance may not be repeated.
CI Global Asset Management is licensed by WisdomTree Investments, Inc. to use certain WisdomTree indexes (the “WisdomTree Indexes”) and WisdomTree marks.
“WisdomTree®” and “Variably Hedged®” are registered trademarks of WisdomTree Investments, Inc. and WisdomTree Investments, Inc. has patent applications pending on the methodology and operation of its indexes. The ETFs referring to such indexes (the “WT Licensee Products”) are not sponsored, endorsed, sold, or promoted by WisdomTree Investments, Inc., or its affiliates ("WisdomTree"). WisdomTree makes no representation or warranty, express or implied, and shall have no liability regarding the advisability, legality (including the accuracy or adequacy of descriptions and disclosures relating to the WT Licensee Products) or suitability of investing in or purchasing securities or other financial instruments or products generally, or of the WT Licensee Products in particular (including, without limitation, the failure of the WT Licensee Products to achieve their investment objectives) or regarding use of such indexes or any data included therein.
The CI Exchange-Traded Funds (ETFs) are managed by CI Global Asset Management, a wholly-owned subsidiary of CI Financial Corp. (TSX: CIX; NYSE: CIXX). CI Global Asset Management is a registered business name of CI Investments Inc.
©CI Investments Inc. 2022. All rights reserved.