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Tactical ETFs Tackle Inflation-Protection, Allocation

Paul Justice, CFA

Paul Justice: Simple solutions for complex world.

Hi there. I'm Paul Justice, director of ETF research at Morningstar. I'm speaking with Chris Goolgasian, head of U.S. portfolio management at State Street Global Advisors.

You've recently launched a suite of actively managed ETF products, really fund-of-fund products that help people choose between multiple asset classes, multiple geographies that they can incorporate in the portfolio, perhaps either give them sources of return outside of the U.S., or even protect them from inflation.

What I'd like to do today is talk a little bit about your multi-asset real return strategy--how that works in a portfolio and what investors can really expect to get out of that.

Chris Goolgasian: So I think that we've seen in the marketplace, be it again institutional or individual, a lot of concern about the future of inflation. There are times when that concern is borne out of fear of supply and demand in the commodity market, and there are other times, like right now, where that fear is borne out of the paper printing coming out of our bankers. So, wherever that fear is borne out of, the idea is that you should buy insurance, classically, when it's cheap and before the storm has happened.

So, with our real asset fund, we are positioning the portfolio to give you access to those asset classes that may help you in that rising inflation environment. So you have a portfolio that has a mix of commodities, natural resource equities, inflation-protected bonds, and REITs, real estate investment trusts.

And what we're doing is tactically maneuvering between those asset classes to try and beat CPI, Consumer Price Index, by 2% to 4%. So, if we can do that, then we can provide our investors a real return that can help them grow their wealth, and in this environment where you have 10-year Treasuries trading at yields below inflation, you're certainly in need of some additional return to get beyond that negative real return that investors are facing in most parts of the curve.

Justice: People need to temper their expectations, so they get into something like this, where you're talking inflation plus 2%. If we get in the 30% return world for equities, you're not going to be there. So there is a trade-off for getting into this balance of safety for the possible upside of the rest of equities.

Goolgasian: Absolutely.

Justice: Whereas if we look at something more global, your Global Allocation Fund, GAL is the ticker on that one, this probably has a more volatile approach, but I guess, a higher potential reward as well for a person if they allocate that to their portfolio. Can you just talk a little bit about what that fund strategy is?

Goolgasian: GAL is really focused to help investors with their home-country bias. So, whether it's U.S. investors investing in U.S. stocks or Canadians in Canadian stocks or Japanese in Japanese stocks, the home-country bias is well known throughout the world. So what we've done here is to construct a portfolio that is really global in nature.

So in the equity space, for example, we have market-cap-weighted the exposures so that U.S. is actually less than developed and emerging, because those are in fact the true weights on a global basis. Now if you were just a U.S. investor, though, with a typical portfolio you would tend to have 80% to 90% of your money in U.S.-based stocks.

So we are trying to provide that diversification across all the asset classes. So, this portfolio doesn't just own U.S. and non-U.S. equity and emerging-market equity. It also owns U.S. and non-U.S. REITs, U.S. and non-U.S. inflation-protected bonds, U.S. and non-U.S. corporate bonds, Treasuries, on and on and on. It has also has size and style scope, so we can move from large, mid and small, both U.S. and international.

So, by devising the portfolio in that way, we think we can really help investors be more broadly diversified, remove some of that home country bias, and obtain exposure outside of the U.S.

Now on top of that is the tactical. So, in a world in which the headlines and also the valuation and economic data is changing so much, we think that our tactical approach, which we have a long history at, can really be beneficial on a global scale. So we can move between developed and emerging markets, between real estate and bonds, between large and mid and small cap to try and add that extra return for investors.

Justice: Sure. So you help eliminate the bad behavior that investors in the retail side, advisors and individuals alike, tend to have that herd mentality to rush into the asset classes all at the same time, which is usually the wrong time.

Goolgasian: Right. That's right.

Justice: It is great that you are lending a hand with that with one ETF solution for one problem and another for another. Thank you for joining me, Chris.

Goolgasian: Thank you, Paul.