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A top strategist for BlackRock’s ETF business shares 3 winning market themes that could define the rest of 2021 — and how to nail the reopening trade

  • BlackRock says infrastructure, emissions, and interest rates will be vital second-half market themes.
  • Gargi Chaudhuri of BlackRock’s iShares ETF unit explains how investors can bet on each of those.
  • She also recommends that investors raise the quality of their portfolios using tech stocks.

As the world’s largest asset manager and the largest issuer of ETFs, BlackRock’s investment views carry a lot of weight. 

So when Gargi Pal Chaudhuri, head of Americas Investment Strategy for the iShares ETF division at BlackRock, lays out the following four critical themes for investing in the second half of this year, investors should pay close attention.

“We turn bullish on European stocks and remain constructive on certain parts of the US equity market, inflation-linked bonds and a diversified basket of commodities in the second half of 2021 as the vaccine-led, fiscal and monetary policy-supported global economic restart continues,” she wrote in a recent note.

Investors can access all of those themes using ETFs. While Chaudhuri recommended a series of funds issued by iShares, other funds can also fulfill that purpose.

(1) Rising inflation

Chaudhuri downgraded her rating on US stocks to “Neutral” and upgraded European stocks to “Overweight” as the economic reopening trade evolves. That means narrowing her focus in the US to small-cap stocks and cyclicals, and understanding that global central bankers will try to avoid harming the recovery. 

“While the “reflation trade” centered around high growth and fast-rising inflation was most pronounced in the US during the first half of 2021, we see it broadening to Europe and Japan,” she wrote. 

How to play it: There are many ways to play this theme, including investing in an international value ETF like the Schwab Fundamental International Large Company ETF, a core European ETF like the ProShares Ultra FTSE Europe ETF, a short-duration Treasury Inflation-Protected Securities Fund like the PIMCO 1-5 Year US TIPS Index ETF, or a bank ETF like the Financial Select Sector SPDR Fund.

(2) Climate investments

Chaudhuri says countries around the world will have to invest trillions to reduce carbon emissions to the levels that will be necessary to stop the climate crisis from getting much worse. That will drive new investments in technology, as well as in commodities like lithium and copper.

“A transition is underway toward a “net zero” global economy — one that emits no more greenhouse gas than it removes from the atmosphere by 2050,” she wrote. “To reach net zero emissions by midcentury, annual clean energy investment will need to more than triple by 2030 to around $4 trillion.”

How to play it: Clean energy funds like the Invesco Global Clean Energy ETF, an environment, society and governance-oriented fund like the Vanguard ESG US Stock ETF, and a broad-based commodities fund like the iPath Bloomberg Commodity Index Total Return ETF all offer a way to invest in this theme.

(3) Infrastructure

Infrastructure might be the hottest investing theme today, and Chaudhuri says it still has a lot of room to run as a US infrastructure spending bill develops. She says it’s wise to buy into it through ETFs directly focused on infrastructure, as well as municipal bonds and cybersecurity.

“Some $3.1 billion has moved into US infrastructure ETFs,” she said. “We expect demand for liquid and transparent ways to invest in infrastructure to increase as negotiations in Washington, D.C. move from rhetoric to reality.”

How to play it: An infrastructure fund like the Global X US Infrastructure Development ETF, a municipal bond fund like the First Trust Municipal High Income ETF, an electric vehicle-oriented fund like the KraneShares Electric Vehicles and Future Mobility Index ETF, and a cybersecurity fund like the First Trust Nasdaq Cybersecurity ETF are great options for investors.

(4) Barbells in stocks

In keeping with Chaudhuri’s view that the low-hanging fruit in the US has been picked, she says that cheap and highly-leveraged stocks have outperformed since November — which means it’s time to look further ahead in the recovery.

“It may be time to tilt toward mid-cycle beneficiaries, which tend to be “quality” stocks — those with positive fundamentals (high return on equity, stable year-over-year earnings growth and low financial leverage),” she said. “We favor technology given the sector’s strong company balance sheets and free cash flows.”

She says an emphasis on quality will also help investors deal some key challenges facing the market today, like fears about rising input and labor costs, greater interest expenses, and rising effective tax rates.

How to play it: Quality-oriented funds like the Flexshares International Quality Dividend Index Fund ETF and the SPDR MSCI USA StrategicFactors ETF, or focus on technology with a chip-specific fund like the Van Eck Vectors Semiconductor ETF.

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