Diversification: A Key Theme in 2020

For enhanced portfolio diversification, consider global infrastructure, international equities

Without doubt, 2019 was a stellar year for equities – especially U.S. equities, which have enjoyed one of the longest bull markets in history. With ample support last year from the U.S. Federal Reserve, U.S. markets seemed to hit record highs almost every week.

Looking forward, however, the gains of 2019 will be hard to repeat. While concerns over the trade war between the U.S. and China have largely abated, the drop in oil prices and the spectre of COVID-19 present major challenges to global growth. Gauging of the economic impact at this stage is nearly impossible.

Given these developments and outlook, we believe advisors should focus on a comprehensive risk-management strategy that includes both alternative assets and strong geographic diversification to help manage downside risks.

International Equities: Going Beyond North America

One of the cardinal rules of investing is don’t put all your eggs in one basket. While U.S. markets have delivered strong returns over the last decade, that hasn’t always been the case. And yet recency bias may be leading some investors to become overexposed to U.S. equities. Given many of the stretched valuations in U.S. markets, now may be the time to consider rebalancing one’s equity portfolio to ensure better diversification. For attractively priced opportunities, it might be wise to look beyond North America.

Dynamic Active International Dividend ETF (DXW) is a flexible mandate that focuses on dividend-paying equity securities of businesses across the world that are trading below their intrinsic value. DXW provides access to a well-diversified, concentrated portfolio that aims to deliver stable income to investors.

Global Infrastructure: A Proven Diversifier

When it comes to alternative assets, infrastructure has long been a staple for pension plans and foundations, which understand the asset class’s compelling diversification benefits. As an asset class, infrastructure delivers multiple levels of diversification: by geography, underlying assets, industry and even by market capitalization. Consequently, infrastructure assets have historically delivered lower correlated returns to traditional investments–like stocks and bonds–and reduced volatility.

An Opportunity for Long-term Growth

According to McKinsey Consulting¹, approximately $60 trillion needs to be spent over the next 10 to 20 years to ensure the essential services provided by infrastructure adequately meet society’s basic needs. Insufficient infrastructure spending across the globe; therefore, provides an attractive long-term growth opportunity for global infrastructure companies – and for advisors looking for downside protection.

Dynamic Active Global Infrastructure ETF (DXN) provides access to real assets through publicly traded companies that have historically shown a low correlation to stocks and bonds. Through its flexible global mandate and active management philosophy, DXN has the potential to enhance portfolio diversification, mitigate downside risk, and provide income to investors.

A Word About Active ETFs

As more investors turn to ETFs to form a part of their investment plan, the demand for active management within the structure has increased. Actively managed ETFs may help meet this demand as they have the power to differentiate client portfolios by uncovering opportunities beyond the benchmark. Dynamic Active ETFs deliver high active share and concentrated portfolios focused on our portfolio manager’s best investment themes.

Visit dynamic.ca/innovation to view our entire suite of Dynamic Active ETFs.

¹ McKinsey Global Institute, June 2016, "Bridging Global Infrastructure Gaps." Retrieved from https://www.mckinsey.com/industries/capital-projects-and-infrastructure/our-insights/bridging-global-infrastructure-gaps

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