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Stonehage Fleming ’ s Peter McLean : How to use ETFs in transitioning markets
Peter McLean , director of investment strategy research at Stonehage Fleming , said he has been using equally weighted ETFs to capture the regime shift in markets over the past three years
By Theo Andrew
Markets have been on somewhat of a rollercoaster over the past few years but ETFs have helped investors navigate the volatile landscape , according to Peter McLean , director of investment strategy research at Stonehage Fleming .
Since the pandemic lows of March 2020
– and the subsequent stock market boom – followed by the volatility of the past 18 months , the market regime has changed significantly as investors look to navigate the new high interest rate paradigm .
One way to capture this , according to McLean , who uses ETFs for both core and tactical elements of his portfolio , has been to place more emphasise lower down the market
“ We have seen quite a clear shift in leadership in markets over the past few months . Cyclical sectors , which tend to be smaller companies , have performed better than the more defensive sectors . This is where we have a bit of a bias ”
cap by using equal-weight ETFs . “ An area we are focusing on at the moment is small and mid-caps and that is where ETFs can certainly play a role ,” he said .
“ One of the ways we are doing that is through an equally-weighted S & P 500 ETF , which allows us to tilt away from the top of the market while emphasising stocks and sectors further down the cap spectrum .”
The events of the past couple of years have arguably favoured value stocks , which in part explains McLean ’ s preference for an equalweight strategy .
“ We see most of the earnings and valuation pressures still at the top of the market ,” he said . “ It is in part a value play . The price to earnings ( P / E ) multiple of the market-cap weighted index is much higher . “ We have seen quite a clear shift in leadership in markets over the past few months . Cyclical sectors , which tend to be smaller companies , have performed better than the more defensive sectors . This is where we have a bit of a bias .”
Despite this , the S & P 500 has rebounded strongly since the recent banking crisis , returning 7 % since March lows , with the market pricing in the likelihood the Federal Reserve will cut rates later on in the year .
Over three years , however , it is the equallyweighted ETFs that have come out on top , with the S & P 500 Equal Weight index returning 93.5 % since March 2020 lows , versus 79 % for the S & P 500 , as of 21 April .
Elsewhere , McLean has seen opportunities in the reopening of China and the swift recovery of the Chinese consumer but through Europe as opposed to emerging markets . “ The main way in which we are playing the reopening is through Europe , where we have allocations to very contrarian value funds ,” he said .
McLean added the firm has not allocated heavily towards emerging markets but sees a gap in the market for a southeast Asia ETF excluding China which tends to dominate emerging market indices .
“ The regional allocation is dominated by the likes of China , India and South Korea but there are good opportunities in areas such as Vietnam and others in the surrounding region , so an ETF around emerging markets Asia excluding China is quite interesting ,” he said .
Theo Andrew is a senior reporter at ETF Stream
14 ETF INSIDER | MAY 2023