Sam Huszczo SGH Wealth Management ETF-only portfolios factor-based Bond Ladder

Advisor Recommends a Bond Ladder With ETFs

Heather Bell | | Mar 6th, 2023’s Heather Bell spoke with Huszczo recently about how his firm is approaching equities and fixed income.

How do you approach equity investing via ETFs?

Huszczo: “We consider ourselves Factor-Based Investors on the stock side. For the last 50 years, whatever they’ve described as ‘alpha returns’ have just been factors, in my opinion. [We approach it as] the marriage of an old, tried-and-true way of quantitative Factor-Based institutional investing, with the modern spin of the current economic conditions.”

“One thing that was a huge innovation is being able to take these algorithms based on a factor and [offer them at] an extremely low expense ratio, and then allow people to buy smaller net dollar amounts within that type of very sophisticated factor.”

“Back in the ’80s, this was done with pen and paper, so that’s why only an institution could really afford that type of research team. Now [we’re] replacing that with a fluid, algorithmic computer that can just put it in an ETF form and make it so everybody can access it.”

What factors are you focusing on now?

Huszczo: “One of the factors we like right now is Stock Buybacks in the face of a potential economic recession due to the inverted Yield Curve. For companies that have a lot of cash on their books, if their decision making is to utilize that cash to buy their stock because their stock price is so low, versus them keeping a little bit of dry powder on the books to handle what could be a bad economic zone, to us that is a push against the asymmetric information that we always have as analysts.”

“Our second-highest conviction factor is the Momentum factor. We want to do a light version, a contrarian [take], where we go against what is the most popular thing, and so that’s where this could potentially be a play. We see Momentum excelling if inflation starts to get under control. Even if inflation were to get into the 4% range, we feel that’s going to be the trigger to push the stock market into the next bull market phase.”

How are you approaching fixed income right now?

Huszczo: “With investors having lost so much in their bond portfolio last year, we [think] it might be a difficult decision for them to lock in a long-term bond rate, once the Fed has announced that they’re pausing rate hikes.”

“It puts you in a weird, temporary position today where, if you try to seize those higher long-term rates and lock it in today and they keep raising rates, then you’re going to have a little bit of buyer’s remorse. Because if you were just patient, you could have locked in a higher rate at that time in the future.”

“The Government’s between a rock and a hard place, where they can’t really raise interest rates much higher than we have right now, without significantly impacting the U.S. Government’s budget.”

“They have an incentive to keep rates low. That to me would also argue that they will stop interest rate hikes, even if the labor market is going well and the economy is still doing well, just as long as inflation starts to come down some.”

“The bottom line is if you look at the dot plot, almost all the Fed voting members in 2024 and 2025 and beyond are voting for rates to come down somewhere between 2% to 3%. This is the moment to lock in a long-term rate for the next 10-15 years. And an appropriate ladder, I think will be able to get around a 5.5%-6% coupon at that time.”

“In college, textbooks said you could get a 6% return in a Corporate Bond Ladder, and then 2008 happened. For the last 15 years, there hasn’t been a moment where you could get a 6% fixed return on a Bond Ladder.”