ETF Expert Corner

iShares’ Tushar Yadava Talks Presidential Election, Minimum Volatility ETF

October 25th, 2016 by ETF Store Staff

Tushar Yadava, Investment Strategist at iShares, offers perspective on potential investment implications of the upcoming presidential election and spotlights the iShares Edge MSCI Min Vol USA ETF (USMV).



Transcript

You can listen to our interview with Tushar Yadava by using the above media player or enjoy a full transcription of the interview below.

Nate Geraci: I'm now pleased to welcome to the program Tushar Yadava, Investment Strategist at iShares. iShares is the largest ETF provider in the world. They're approaching $1 trillion in US ETF assets, and they offer over 330 US based ETFs. Tushar is joining us via phone today from New York. Tushar, great to have you back on the program.

Tushar Yadava: Thanks for having me back on.

Nate Geraci: Tushar, in our first segment, Jason and I looked at some of the historical market data surrounding presidential elections, and what it shows is that there doesn't appear to be any real meaningful longer term impact based on which party wins the White House. However, in the short term, there is some evidence of additional market volatility around the election, and we also know that different policies and agendas from the candidates can impact certain sectors of the market; again, especially in the short term. I thought we might start with that today. As you look at US stocks, are there any areas where you think we could see a shorter term impact depending upon who wins the election?

Tushar Yadava: There's definitely some markets that you could say are pricing some results in or moving with the shift in the campaigns today. I think it's important to just re-emphasize the point that regardless of the candidate, or even the election, policy manifestos tend to touch on sectors in a couple of ways - in spending or in regularly three ways. In any way that you're looking at it, you've got to focus on what we know today versus the large amount of the unknowns. Right? So we don't know the makeup of Congress. We don't know the candidate that's actually going to win. We don't know the extent of the policy even that they're going to be doing, so to be thinking about making shifts in your portfolio says a lot based on just those unknowns alone. With all that said, I think there's a few areas that we're looking at that we're seeing those impacts already today. Healthcare is an obvious one. I think the Democratic platform is very much pro the existing changes that have been put in place, like the Affordable Care Act, and that's obviously going to be a central point of the Republican campaign if they were to win. We're seeing, you know, as the Democrats do better, you tend to see healthcare is improving versus the opposite is when the Republican candidate is gaining strength, you start to see healthcare maybe sell off or suffer a little bit. There's some of that. The Democrats, you know, are more looked at in terms of putting into healthcare some pricing power changes, some regulation, and some spending changes as well. That all could hit the healthcare sector and be negatively impacted there. The other side that we see is in financials. On both sides here, there are real policy decisions that are being made that could on the one side impact regulation. That could be, on the Democratic platform, that could be a negative for financials. On the other side, what you're seeing is there could be very expansionary policies and much more hawkish views on interest rates from the Republican platform. That could affect interest margins and a lot of the financial space. We're seeing those two areas move. Healthcare is negative with the Democrats and so is financials. Then on the Republican side, we've seen the Republican candidate has had a very huge swing on the certain emerging market assets. The Mexican peso, for example, and Mexican stocks have moved very much on how well or not so well that the Republican candidate is doing. For both of them, I think, trade is going to be a big issues. You've seen it come up in the campaign. When trade starts to suffer, generally that's not a good backdrop for emerging market assets, just looking through history. There's a few different ones there. I think the biggest ones are step back and think about it in the long term, as you guys have been doing today, is to think about volatility. That's one area where I think a lot of people can agree is that as we go through the last few days of the campaign, as we go through the outcome and how that plays itself out, volatility is probably something we do think historically has shown that it rises, and as we go into this election, we do think will probably rise as well.

Nate Geraci: Tushar, what about infrastructure spending? Because it seems like one of the few areas both candidates agree is that we need to improve our roads and bridges and other aging infrastructure in this country. Is there an investment opportunity here?

Tushar Yadava: It's a tough one to look at in a lot of ways, because both candidates agree on it. Again, the devil is always in the details here, so we haven't seen as much of that on the details. Also what's important to know is we've seen run-ups in some of these stocks already today. I think you've got to understand that even with the most shovel ready of projects, and that's what we saw in 2008, 2012, is it still takes time for them to come through. You still need the details to emerge on how they're actually going to go about the spending. Look, it's important and fiscal spending and infrastructure spending has come up mainly because of the limits of monetary policy that we've hit. I think it's important to remember that it's very compelling to policymakers to look at the fiscal multiplier and see how big it is at the lower interest rate environment that we're in. That's very appealing, but you've got to understand that you can't price all that in today. While there is some great infrastructure opportunities, you've got to make sure that you know what the details are, you know what the levels of the spending are. Just to give you, I talk a lot with clients and I think that this is a really easy way to remember it. Even some of the biggest infrastructure projects that we've taken in the past - thinking about the Roosevelt era - the Hoover Dam, for example, in its day was less than half a basis point of GDP in terms of its actual cost to produce. You need a lot of fiscal spending, and you really need to see those details emerge before you can really make a lot of investment decisions, but over the long-term, there could be an opportunity there depending on the details.

Nate Geraci: Again, we're visiting with Tushar Yadava, Investment Strategist with iShares. Tushar, you began to touch on this earlier in talking about shorter term volatility around the election. I certainly think partly because of the election and also because of some other factors such as the Fed policy and Brexit, we've seen investors flocking to low volatility ETFs this year. One of the biggest recipients has been the iShares Edge Minimum Volatility ETF, Ticker Symbol USMV. Two questions here. First, can you just briefly explain to our listeners what this ETF is designed to do? And then, two, there's been some debate about whether too many investors have piled into low volatility ETFs and perhaps pushed up valuations. I'm just curious. Where do you stand on that?

Tushar Yadava: Sure. Let's go one at a time here. The minimum volatility solution is our way of looking at taking a portfolio of stocks. I mean, you mentioned the US product, so I'll talk about the US product, but we have products across the global stock exposure, across the EM exposure, across the developed countries exposure, but for this case, we'll just talk about the US. The US minimum volatility approach is basically taking a portfolio of stocks that is designed to maintain a market exposure with some stock caps and some sector caps, but overall, what we're trying to do is deliver you market returns with less risk. We try and define risk across a portfolio level. Now, what happened is, and empirically we can show this, and this answers your second question, is what you're seeing is minimum volatility profilers have provided more return per unit of risk than some of the large cap weighted portfolios. Think about an S&P 500 or an All-Star US index. To many, that's been very appealing. It's this idea of capturing some of the upside. Maybe not all of it, but being protected from the downside, and there's a lot of negative news flow, a lot of volatility in markets at the moment. That's really what's contributed to having that investor nervousness and that's what's pushed them towards this idea of trying to protect from the downside but also participate on the upside. That's what's made it such a popular solution. Now, your other question about valuation and crowding. What we've done, and we've done a lot of research on this topic alone, is that it just doesn't seem to be borne out by the data. Minimum volatility ETFs have been shown to do that exact function, reduce risk, whether valuations are historically high or historically low. That's what we come back to. If you're buying this portfolio or this ETF as a portfolio solution to reduce your risk, that's the job that it's doing. Now, the other thing, you mentioned the word crowding. It's important to think about these portfolios in terms of the size that they represent. They're a very, very small fraction of the market cap and a very, very small fraction of the underlying securities, so any overcrowding concerns are a little bit hard to bear when they're less than half a percent of the overall stock market and active mutual funds, for example, are about 15% of the stock market. There's just not enough of an ownership to move the needle in terms of crowding.

Jason Lank: Tushar, this is Jason Lank. Following up with Nate's question, it's my personal opinion that many of the reasons that the various premiums in the industry exist is because historically they've been hard to implement for the individual investor. Now, every investor can take advantage of this concept with this ETF for 15 basis points a year. That's an amazing development. My question is: As the popularity continues and as the ease of access continues to improve, is there an arbitrage opportunity here? Will the premium continue to exist as the way to take advantage of the premium becomes obvious?

Tushar Yadava: There's a lot to look at in that. I think what's important to think about is, what have we designed this solution for? We've designed it to lower that risk. Risk reduction, in any way, shape or form, we've taken this minimum volatility approach to it. Over time, all you're trying to do is soften that outcome. That's what this portfolio is trying to do. In terms of, is there enough of an arbitrage opportunity or do you find these premiums, what we found is we create these factors, these single factor exposures and all of our factor line up looking at delivering long-term value with persistent long-term factors that show up across market cycles. This is one of those examples. Now, a function of the environment that we're in is when any asset outperforms or gathers a lot of flows, you suddenly start to get these questions, be it from active management, be it from investors that are just asking the logical question, "Has it gone too far too fast," that's what we're seeing at the moment. I think when you step back and look at it, though, all of these questions are about lower risk solutions. It's not as though you're trying to take more risk or you're really trying to really outperform the market. We're not saying that this solution does that. We're saying this solution just lowers your risk. Over time, it's not supposed to capture more upside than the market overall. I think that premium that you speak of is maybe just a fragment in time that we're looking at. As we move through time, generally the higher risk exposures will probably start to deliver higher returns. We're worried about lowering your overall risk profile and delivering you that better return per unit of risk. There's a difference there. I think that the market will probably, as you start to see the momentum slow down, the inflows and the attention move on to other areas of the market.

Nate Geraci: Tushar, just one last question on minimum volatility. When you look at something like the iShares MIN Vol ETF, and obviously this is going to depend on an investor's specific situation, but in general, do you view this as (1) a core holding, and then (2) does this replace existing US stock exposure? Does it complement it? Just high level, how should investors think about this ETF in the context of their portfolio?

Tushar Yadava: What we're trying to do is we're trying to construct this so that you maintain a market-like exposure. That's why at the very, very outset I said we put stock caps and sector caps on it so that we don't just end up with a portfolio that's very weighted to a single sector or very weighted to a single holding. Now, the reason that we've done that and the reason that we're trying to deliver that in a very cost-effective manner is because we think that investors can position this at the core of their portfolios if they're holding it for long periods of time. Now, what it's going to do over that, it's going to give you market exposure, it's going to keep you invested in a similar sector stock exposure to the market but just try and do it at a lower risk. If you're one of those investors that has a very long-term horizon and is trying to take your risk down, this is a great way to implement it. What it's not is it's not a way to time the market and dial up and dial down your risks. I like to talk about this when I talk with advisors as, it's a market timing hedge. It just keeps you invested, and that's half the battle. Investors that are looking at that and they don't want to weather the ups and downs of the market over short periods of time, those are the investors that we think have really flocked to this solution.

Nate Geraci: Again, we're visiting with Tushar Yadava, Investment Strategist with iShares. Tushar, we have just a few minutes left. Since we have you on the line here today, I did want to ask you about the recent move by BlackRock to cut fees on 15 iShares ETFs. This included some very popular ETFs, such as the iShares Core S&P 500 ETF. One of the factors noted for these fee cuts was the DOL fiduciary rule. Can you maybe provide some color here? This is obviously wonderful for investors. Is the DOL fiduciary rule the primary driver?

Tushar Yadava: This is a landmark move that we've made to help advisors transition. This is going to be a major shift in this DOL fiduciary role, so we're helping them make that transition by providing investors with a quality index exposure across our core lineup and we're doing it at a great value that they can put at the center of their portfolios for long periods of time. This is just one of the many enhancements and innovations that we're trying to make to help those advisors build better long-term portfolios for their investors.

Nate Geraci: Tushar, with that, we'll have to leave it there. As always, we appreciate you joining us on the program. As it turns out, we'll be visiting again next week to spotlight the iShares Residential Real Estate Capped ETF. We certainly look forward to that as well. Thank you.

Tushar Yadava: Pleasure talking to you guys.

Nate Geraci: That was Tushar Yadava, investment strategist with iShares. You can learn all about the iShares ETF lineup by visiting ishares.com.