00:00 Speaker A
Well, stocks do typically perform better in the wake of cuts from the Federal Reserve. My next guest has a playbook for how ETF investors can potentially take advantage of any post-cut bump.
00:08 Speaker A
Marissa Ansel, Goldman Sachs Asset Management Head of ETF Investment strategies, joining me now on set for this week's ETF report brought to you by Invesco QQQ. Marissa, thanks for being here.
00:23 Speaker B
Thanks for having me.
00:24 Speaker A
So, I I guess first of all, to set the table, we should talk about what the Fed is going to do today and what we're going to hear from them. 25 basis points, a quarter point cut is what's broadly expected.
00:36 Speaker A
Um the other things that Jennifer was talking about, kind of the signals for what's next. What are you looking for and expecting?
00:44 Speaker B
Yeah, so our uh base case expectations are again in line with consensus, 25 basis point cut today. Uh we expect another couple of uh 20 basis 25 basis point cuts through the end of the year, followed by another couple uh in the first half of next year.
01:03 Speaker B
But what we're really focused on is helping our clients position their portfolios in this new environment. And I think there are a few uh simple things uh that clients can do uh to help position for this. Uh number one, step out of cash uh and consider uh ultra short duration uh bond strategies. Number two, focus on income. Uh and I think the equity market can actually be a great source of income with derivative income type uh ETFs. Uh and number three, consider small caps. Um you know, with rates coming down, that's a really nice tailwind for the small cap asset class. Um and we think that there's a pretty nice setup uh for small caps from here.
02:08 Speaker A
So, let's take those one by one. Sure. Um so in the first, to step out of cash and into ultra short bond ETFs, sort of what's the big difference between those two? Because I sort of think of them in a similar bucket.
02:16 Speaker B
Exactly. Exactly. And I think uh so I think that's that's how a lot of investors think. But I think uh what they can do is to the extent they have either cash holdings or or money market fund holdings in their portfolio, um they're going to be earning even less interest, of course, with rates coming down. And so, you know, to the extent that investors are saving, let's say for next year's family vacation, right? So they don't need access to that cash for the next 6 to 12 months. a good thing that they can do is actually go one step out into ultra short uh bond ETFs like GST, which is our ultra short bond ETF uh or GMI, which is our ultra short municipal income ETF. Um because you can pick up, you can lock in uh higher yields and really pick up sort of 30 to 40 basis points uh or more of additional yield without
03:22 Speaker A
Okay, you're saying ultra short. I heard in my brain ultra short term, like short time duration. You're talking about actually shorting the bonds. So that
03:32 Speaker B
Oh, no, no. uh, no, no, going long the bonds, but with ultra short duration strategies.
03:37 Speaker A
Okay, so it is ultra short duration. Okay, so I did understand it correctly. Okay, good. Um let's talk about um the income part of this here. Are you focusing on sort of dividend payers as a source of income? You mentioned derivatives. How does that all work?
03:52 Speaker B
Right. Right.
03:53 Speaker B
Yeah, so I think, you know, with yields coming down, uh putting, you know, pressure on yields and traditional fixed income investments, again, the equity market can be a really great source of of income. Um and this year we've seen derivative income ETFs be a huge uh flow gainer. Um, you know, $44 billion of flo into derivative into derivative income ETFs like uh GPIX, GPIQ, um our premium income ETFs. And the reason why is because they help investors solve for uh several challenges. So, they provide equity exposure but with less volatility. So, you know, that's ideal in the current market environment. But they also pay out, you know, high, uh consistent, regular income, uh which is great for investors looking to solve for their income needs.
04:36 Speaker A
Gotcha. And then the small caps, which I I would argue is probably the most controversial of the three. Um because we've been hearing um some investors beat the drum on small caps for a while now and we have not seen them come back.
04:54 Speaker A
So, is it rates are going to go down and this is it?
04:57 Speaker B
So, I don't think that's it, but I I think you're right. Um, you know, small caps have been playing a little bit of a waiting game, you know, so far this year, right?
05:01 Speaker A
Yeah.
05:05 Speaker B
because they've been waiting for the Fed, I think to to cut uh interest rates. I think that's a great backdrop for the small cap asset class. They do have more floating rate debt, so they're more they're going to benefit more uh than larger caps from, you know, as rates come down. Uh but in addition, we think uh the setup for small caps is actually really attractive from here for a couple of uh key reasons. So number one, fundamentals are are really good, they're really solid. Um small caps are set to grow their earnings by 30% next year, visa- V 10% for large caps.
05:40 Speaker B
Number two, um IPO and M&A activity has picked up in a in a pretty big way actually. Um, you know, M&A volumes are up uh 30% versus the same period last year. The number of IPOs is up more than 50% uh year- on- year. Um so that's a really nice uh sort of catalyst uh for the space.
05:59 Speaker B
And then number three, and this is sort of the kicker, valuations are actually still incredibly attractive um for small caps. So the median uh small cap company is trading at a 27% discount uh to large caps. And so, you know, putting all that together, you've got this tailwind of the Fed now finally starting to cut rates. You've got a really nice setup uh I think for the for small caps from here.
06:18 Speaker A
And do you want to buy small caps in Toto as an asset class or do you want to sort of screen out prof more profitable companies, you know, through an ETF process? How does that?
06:27 Speaker B
Yeah. The the I think definitely the latter. Um, you know, you really don't want to buy the whole benchmark, um, particularly in small caps. And the reason why is because, you know, about a third of small cap companies are actually loss-making. And so it's really, really important to go active. Uh we're an active manager, you know, our small cap ETF, GSC, uh is is actively managed. Um I think it's really important to focus on, you know, the best companies, focus on on fundamentals, uh as well as as valuation.
06:54 Speaker A
So, I'm curious, these are sort of three changes that you're recommending people make. Is there also sort of a big stay the course theme through the rate cutting cycle?
07:05 Speaker B
There is. Yeah. Um, you know, history actually shows us when we look at the data that the best investment strategy over time has been to stay invested rather than trying to be sort of too cute and and time the market. Um I think that's incredibly difficult. And so we are recommending to our clients, you know, stay invested, but at the margin, you know, there are different tools that can be really useful for this environment such as, you know, stepping out of cash, you know, considering small caps and and focusing on income.
