During the past month, I had the opportunity to speak with Jay Jacobs. He's the Director of Research at Global X, the New York-based ETF sponsor that oversees nearly 50 different ETFs and manages over $3 billion in assets.
While the company may be best known for its SuperDividend ETF (NYSEARCA:SDIV) and SuperDividend U.S. ETF (NYSEARCA:DIV) and the combined $1 billion in assets between them, Global X offers funds that provide investment exposure to areas such as energy, MLPs, social media, gold, silver, uranium, copper, Greece, China and Japan. More recently, Global X has joined in on the smart beta trend and now offers a total of four smart beta (or scientific beta) funds.
In our conversation, we discuss the high yield market, smart beta funds, oil prices and themes to keep an eye on throughout the rest of the year. My personal thanks goes out to Jay for taking some time out of his busy schedule to offer up his thoughts.
Note: Since our discussion, it was announced that JPMorgan (NYSE:JPM) bought a minority stake in Global X in order to expand its presence in the ETF space. While we don't discuss it here, it was noted that the relationship is a strategic partnership as opposed to a buyout and that "Global X is still Global X."
(Dierking): To start out with, can you tell me a little bit about your role overseeing investment research at Global X?
(J. Jacobs): The research team at Global X focuses on three key areas: Education, Insights, and Portfolios. "Education" refers to how we communicate with our clients and seek to explain the behavior of a particular asset class, or how a particular strategy works. "Insights" is inclusive of our aim to examine and provide ongoing information on market trends. This is done, in part, by developing reports and opinion pieces. Lastly, we provide assistance with portfolio construction to help clients understand how a particular fund or strategy can fit within their portfolio or can be used to potentially achieve specific goals.
(Dierking): The Global X SuperDividend ETF and the SuperDividend U.S. ETF are your two biggest funds accounting for over $1B in assets between them. What areas of the market are you finding attractive right now for high yielding stocks?
(J. Jacobs): We find that high yielding stocks are broadly attractive for a few reasons. First, when we brought the SuperDividend ETF to market in 2011, we were seeking to help investors maximize the income they could generate from equities in an environment where traditional fixed income was not providing high enough yields for many investors. As 10-year treasuries are still yielding below 2% in 2016, income-focused investors still need to look to other strategies to fill the gap between their investment goals and what bonds are paying.
Second, the mature state of many industries, slowing developed market GDP growth, and the fully-priced equity valuations in many developed markets, lead us to believe that the next decade could be a low growth environment for developed market equities. Therefore, investors looking for returns from equities should consider dividend paying companies to help mitigate the risk of low- or no-price appreciation. More specifically, we think that some of companies that traditionally distribute a high percentage of cash flows, like consumer staples and utilities, are a nice defensive component of a high dividend yield strategy given the more recent volatility.
More opportunistically, we see MLPs as a potentially strong value play, given their high yields, resilient earnings in 2015, and the long-term nature of the physical pipeline assets.
(Dierking): Smart beta funds have become one of the hottest trends in the marketplace. Global X has several of these funds in its lineup. Can you describe your team's multifactor approach to selecting names for these portfolios?
(J. Jacobs): Smart Beta is a fairly broad term, which can include anything from following the trends of so-called Guru investors, to weighting specific investment factors, like size. The latest iteration of smart beta funds are the "Multifactor" funds - Global X offers four such funds, deemed the "Scientific Beta" suite. Each Scientific Beta fund covers a different region: US (NYSEARCA:SCIU), Europe (NYSEARCA:SCID), Asia ex-Japan (NYSEARCA:SCIX), and Japan (NYSEARCA:SCIJ).
The methodology for these funds was developed by the indexing arm of the EDHEC Risk-Institute, a leading academic institution on applied financial research, based in France. The approach is predicated on selecting a diversified group of stocks that exhibit a particular factor that is well rewarded over the long term (such as Value, Size, Momentum, and Low Volatility), and by seeking to reduce unwanted risks through diversification. The goal of this approach is to outperform market cap weighted indexes like the S&P 500, with similar or lower risk. It also seeks to provide smoother returns than single factor strategies, as an individual factor can see extended periods of underperformance, while other factors can outperform the broad market at the same time.
(Dierking): There are a lot of different opinions as to where oil prices are headed from here. Do you think oil drifts back towards $30 a barrel or are we in for a continued gradual increase over the next several months?
(J. Jacobs): Our opinion is that it is very difficult to predict oil price movements right now, as it's not only being driven by global supply and demand numbers, but also by quotes and rumors from various officials and executives. This human element is unpredictable and highly influential on day to day oil movements, a single quote can dramatically swing the markets. Over the long run though, oil markets are ultimately cyclical and we believe demand will rise in a low price environment and supply will fall, ultimately bringing the market back into equilibrium.
(Dierking): MLPs have had a rough go of it for about a year and a half now. Do you feel that MLPs are at a compelling entry point right now or is there more downside ahead?
(J. Jacobs): The short answer is "both." We believe midstream MLPs are long-term physical assets, which should be able to weather the cyclicality of energy markets. Companies that have a high amount of assets, like MLPs, tend to be more sensitive to adverse business conditions, but they also tend to recover strongly as the environment improves. However, given that MLPs have become increasingly correlated to oil price movements, and oil remains volatile, we could still see some bumps in the road. These bumps can create investment opportunities for value-hunters, but they can also cause some headaches.
(Dierking): Companies like Kinder Morgan (NYSE:KMI) and ConocoPhillips (NYSE:COP) have recently cut their quarterly dividends. Do you think that dividend cuts will be a continuing trend and how are your funds managing that risk?
(J. Jacobs): Traditional c-corp companies have greater flexibility with their distributions than MLPs, and we've seen them use this flexibility to divert cash towards paying down debt or organically funding growth opportunities. Within the MLP space, the vast majority of distribution cuts have been in the upstream space, as these entities have much greater exposure to the price movements of oil. Our MLP ETF (NYSEARCA:MLPA) invests in 20 of the largest midstream MLPs and we saw that, in contrast, these companies actually increased their distributions by over 12%, on average, in 2015. While we don't expect 12% distribution growth to repeat itself in 2016 (largely because of less growth cap-ex expenditures), we do think the average distribution will remain stable for these midstream MLPs.
(Dierking): Any plans for new ETFs from Global X that we should be keeping an eye out for?
(J. Jacobs): Investors will have to stay tuned for future product launch announcements, but we have an exciting pipeline of new ETFs for 2016 as we look to continue to expand our lineup and provide high quality solutions to our clients.
(Dierking): Finally, what are some themes that investors should be paying attention to for the remainder of 2016 and beyond?
(J. Jacobs): Our main theme right now is preparing investors for potentially a low growth decade for developed market equities. Many retirement models depend on equity returns of 6-8% annualized, but 4% returns could be the new reality. Fortunately, there are numerous ways investors can seek returns in a sideways market, such as:
- Multi-factor smart beta strategies that seek to harvest returns from historically well rewarded factors such as Value, Size, Momentum, and Low Volatility.
- High dividend strategies that can use above average yields to offset a low growth environment.
- Investing in emerging or frontier markets, which have less mature industries and are expected to have higher annual GDP growth than developed countries over the next decade.
- Investing in targeted industries or themes that could outperform the broad market, such as social media companies benefitting from the changing dynamics of how people communicate or lithium miners and battery producers that could benefit from increased adoption of renewables and electric cars.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.