There are now a number of disruptive factors that could topple normal economic and financial conditions, increasing the need for ETF investors to take a more diversified approach when crafting a well-rounded investment portfolio.
According to State Street Global Advisors, there are five big demographic disruptions that could shake our foundation, including a so-called time bomb, unsustainable pressures on national budgets, demographic dividend in emerging markets, mass migration in a globalized world and behavioral differences between generations.
"Without this appreciation of how demographic forces are disrupting our world and how we should respond, investment opportunities may be missed and longer term risks may become acute," State Street Global Advisors said in a note.
The demographic time bomb refers to the combination of big increase in life expectancy due to advancements in healthcare with dramatic drops in fertility rates. As the working population growth falls and available labor force shrinks, GDP growth diminishes.
The sustainable pressure on national budgets touches upon the growing debt among advanced countries, especially with an aging population that is taking up a greater amount of age-related expenditures.
While the demographic dividend in emerging markets paints a picture of a growing number of young people in developing economies, they are not enough for the developing markets to grow as reforms like education and female participation will be required to create more jobs.
The mass migration in a globalized world has allowed greater movement among countries, but it has also exacerbated friction between migrants and natives and fueled greater geopolitical unrest.
Lastly, the behavioral differences between generations has also confounded many observers, namely the upstart millennial generation that is not behaving like many want. For instance, millennials are getting married and having children later and creating a different economic impact by consuming less.
"To cope with the complexity of the new environment, investors need to adopt multi-period financial models that can handle a broader range of asset classes, time varying risk premia, correlations and volatility," according to a State Street Global Advisors research note. "Finally, they need flexible, lower-cost, multi-asset solutions that factor in future scenarios for growth, inflation and asset prices and can adapt to different market conditions."
ETF investors can gain diversified exposure to the global markets through multi-asset investment strategies, such as the SPDR SSGA Global Allocation ETF (GAL), SPDR SSgA Income Allocation ETF (INKM) and SPDR SSgA Multi-Asset Real Return ETF (RLY) .
GAL is actively managed. The fund invests in other ETFs to build a global diversified portfolio comprised of equities, bonds, REITs, TIPs and commodities. When allocating toward sector positions, GAL utilizes quantitative and fundamental components to partition a chunk of its U.S. large-cap exposure for just market sectors.
INKM is an actively managed fund that can also be viewed as multi-asset income-generating tool. The active fund holds ETFs that track yield producing assets like convertible bonds, debt securities, global dividend equities, preferred stocks and real estate securities. Translation: More than several of INKM’s 20 holdings are likely familiar to a wide range of advisors and income investors.
Lastly, RLY is an actively managed ETF and includes exposure to natural resource producers, commodities, real estate investment trusts and Treasury inflation protected securities. The ETF's aim is to generate both current income and capital appreciation, striving to provide investors with a ‘real return,’ which is a rate of return above the rate of inflation over a market cycle, providing investors whom are not interested in managing multiple ETFs to gain protection from higher inflation and a weaker dollar.
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