ETF Strategy Summit

October 15-16, 2018 | Hyatt Regency | Dallas, TX


Joe Smith – CLS Investments

The Benefits of Diversification

Joe SmithJoe Smith is a Senior Market Strategist at CLS Investments. He specializes in quantitative research, risk management, and ETF due diligence. We recently spoke with Joe, who will be speaking at our ETF Strategy Summit (Oct. 15 – 16 – Dallas), as he shared his thoughts on the benefits of diversification.

ETF Strategy Summit: In 2017, much was made of the convergence of strong markets around the world. Is the higher volatility and divergence this year signs of a new pattern, or merely an interruption to the general trend of convergence?

Joe Smith: The return of higher volatility has created somewhat of a divergence from the strong trends in markets we saw in 2017. Much of the volatility has clearly translated in a greater amount of dispersion amongst stocks globally. We are likely to continue to see this as both foreseen and unforeseen risks globally play out in markets.

ETF Strategy Summit: Where are the world’s most egregious trouble spots, and, to follow up, are there frontier markets where risk is being significantly mispriced?

Joe Smith: There is no single particular part of the world that doesn’t face some risks associated with their markets. Higher relative valuations in the U.S., global debt levels, and investor emotions in CLS’s view pose the greatest threats to the markets in the near term. We believe that this risk can be managed by being properly measured and managed through a Risk Budgeting portfolio construction approach.

ETF Strategy Summit: In 2016, you argued that U.S. equities were becoming expensive and recommended investors take a more international approach to asset allocation – has that perspective evolved as valuations cooled due to increased volatility and earnings growth?

Joe Smith: At CLS, we continue to believe that despite increased volatility in 2018 stocks overseas represent a better opportunity based on their relative attractiveness due to valuations. International equities have largely provided additional diversification benefits to that of their U.S. counterparts and generally have higher return expectations over the next few years.

ETF Strategy Summit: Is taking a single-country approach to ETF allocation versus a regional, international or global index approach worth the additional expense of time and fees?

Joe Smith: Both approaches can be valuable when constructing globally balanced ETF allocations. Regional allocations can provide greater coverage across markets and generally improved liquidity. Country allocations can be great ways to take advantage of a finer cut of securities trading at more attractive relative valuations. Both approaches can also provide great ways to access unique diversification benefits especially with areas that are generally less correlated with broader market movements.

ETF Strategy Summit: How can investors implement factors across a global ETF strategy?

Joe Smith: If an investor has a desire to implement factors in a simple way within their global ETF strategy, multi-factor ETFs provide an efficient way to gain factor exposure without thinking about how to put multiple factor strategies together. If an investor prefers having a greater sense of control with their factor exposure in their portfolios, single factors are great tools to mix and match which factors an investor prefers to dial-up or dial-down in their portfolio. They key for either approach is that investors stay fairly diversified across factor strategies and take a long-term horizon towards seeing the benefits of factors working for their portfolios.

ETF Strategy Summit: Thanks Joe. We look forward to hearing more of your thoughts at the ETF Strategy Summit October 15 – 16 in Dallas.

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