People should begin to lower expectations after years of fast and high growth. In the new low-growth environment ahead, exchange traded fund investors, though, may find higher returns in international stocks category, notably emerging market equities, along with private equity.
“Our five-year return assumptions have steadily moved lower since the financial crisis, amid weak global growth prospects, easy monetary policy and rising valuation,” Richard Turnill, BlackRock Inc.’s Global Chief Investment Strategist, said in a note.
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Turnill argued that expected returns on U.S. stocks are lower from a historical perspective due to high valuations. Alternatively, BlackRock sees more opportunities in non-U.S. equities, but investors will be exposed to greater risks if they seek out these areas of potentially higher returns.
“We see non-U.S. equities offering higher potential returns, along with higher risk. We have, however, downgraded our return assumptions for pan-European stocks due to the likely impact of a Brexit on UK and eurozone economic growth,” Turnill said. “To generate higher returns, investors must be ready to accept more market risk or more illiquidity risk (e.g. alternatives).”
Specifically, BlackRock’s five-year asset class return assumptions include an annualized return assumption of over 6% for emerging market equities and close to 6% returns on global ex-U.S. equities.
Investors can also gain exposure to these broad market segments through ETF options. For instance, the Vanguard FTSE Emerging Markets ETF (VWO) and the iShares MSCI Emerging Markets ETF (EEM) are the two largest emerging market ETFs by assets. Emerging market equities are finally bouncing back in 2016.
The Vanguard FTSE All-World ex-US (VEU) , iShares MSCI ACWI ex U.S. ETF (ACWX) and SPDR MSCI ACWI ex-US ETF (CWI) focus on international markets sans U.S. exposure. Investors who have already included some emerging market exposure should be aware that these all-world ex-U.S. ETFs already have about 15% to 16% weights toward the emerging markets.
Moreover, BlackRock projects private equity will be among the best performing assets over the next five years.
PSP tracks the Red Rocks Global Listed Private Equity Index, which is comprised of 40 to 75 private equity companies, including business development companies, master limited partnerships and other vehicles that invest in, lend capital to or provide services to privately held companies.
PEX tries to reflect the performance of the LPX Listed Direct Private Equity Index, which consists of 30 global private equity companies. The component holdings will have a majority of its assets invested in or exposed to private companies.
Private-equity firms are known for raising cash and borrowing money to acquire a company in an attempt to turn around and re-sell them later for a handsome profit.
On the other hand, the BlackRock team warned that U.S. Treasuries could be among the worst performing assets over the next five years, with Turnill projecting U.S. government debt to decline about 1% each year as bond yields rise from the current historic lows. The broad fixed-income space will also be in for some rough times as we head toward a rising rate environment.
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