Let's fly into the new year by first wrapping up the year that was, in a tale of the tape with the final market stats from 2022. U.S. Treasurys—historically a safety wrap for investors when the equity market is caught up in the waves—were anything but that last year. The Bloomberg U.S. Treasury Index, which is a basket of U.S. government bonds of various durations, fell 14.5% last year—the worst returns in its 40-year history. Those aggressive interest rate hikes scared investors out of bonds, causing more yield curve inversions.
Those rate hikes also brought the bears to the stock market. The Dow finished down 8.75% for the year, climbing out of a bear market in November, rallying 15% in the fourth quarter, but then dropping 4% in December. The S&P 500? Down 19.4% for the year—the worst year since the 2008 financial crisis, and the seventh-worst year on record stretching all the way back to 1929. It did rise 7% in the fourth quarter, but it fell 6% in December, giving up some of those gains. The Nasdaq Composite got hit all year long—down 33% for the year, but only fell 1% during the fourth quarter. But then it was ravaged again in December, falling 8.75% for the month.
That Santa Claus rally a lot of people were hoping for? Not quite. We just lived through the worst December for the U.S. stock market since—get this—1926. Why was the Nasdaq hit so hard? Well, those rising interest rates in the face of slowing growth means profits are going to be squeezed, and investors have been losing confidence in some of their favorite growth stocks over the past year.
Just listen to some of these drawdowns for some of the biggest, most widely-held stocks from their recent highs. Tesla—down 73%, Meta—69%. Amazon—55%, Netflix—58%, Nvidia—57%, Microsoft—29%, and Apple—down 28% from its most recent high. In all, some $30 trillion in market value was wiped off the U.S. stock market last year, according to calculations from the Financial Times.
What did all this wealth destruction do to investors? The average 401(k) balance is down to $97,200, down from $126,000 a year ago. The personal savings rate is at 2.8%. That's down from 8.7% in December of 2021.
If you were looking for upside in 2022, you found it in the oil patch. Nine out of the top ten best-performing stocks in the S&P 500 last year were oil and gas companies. The best performing stock overall in the stock market? Occidental Petroleum (OXY), which gushed returns of 119%. Guess who's been buying a lot of Occidental Petroleum over the past couple of years? Warren Buffett and Berkshire Hathaway. It owns 20% of the oil giant.
Looking around the world, the best-performing country stock market, according to our friends at YCharts? Well, that goes to Brazil, with the MSCI Brazil Index (EWZ) gaining 1.75% on the year. Second place goes to India, with the MSCI India Index (INDA) losing close to 8% in 2022. The worst-performing global market? Well, that belongs to China, with the MSCI China Index (MCHI) dropping close to 25% on the year.
And what a wild year for commodities. Oil and gas prices stole the show last spring when crude oil spiked to over $120 a barrel, and gasoline topped $5 a barrel here in the U.S. But after it was all said and done, orange juice claimed the top spot as the best-performing commodity last year, rising 46% on the year. Heating oil and hard rice were right behind OJ. The crash of lumber prices told the tale of the bear market in the housing market, as prices fell more than 66% on the year—the worst performing major commodity in 2022. Ethanol was also among the biggest decliners on the year. And all that sets us up for the big three this week.
Meet Salim Ramji
Salim Ramji, Senior Managing Director, is the Global Head of iShares and Index Investments for BlackRock and a member of the firm's Global Executive Committee.
Mr. Ramji joined BlackRock in 2014, initially serving as the Global Head of Corporate Strategy. Before joining BlackRock, he was a Senior Partner at McKinsey & Company where he led the Asset & Wealth Management practice areas. He started his career as a corporate finance and mergers and acquisitions lawyer in London and Hong Kong.
Mr. Ramji earned a bachelor's degree in economics and politics from the University of Toronto, a law degree from Cambridge University. He is a Chartered Financial Analyst (CFA) charter holder. Mr. Ramji also serves on the board of the Investment Company Institute and is a trustee of Graham Windham, a New York-based child-care agency.
What's in this Episode?
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If you're looking to take the temperature of the market, look no further than the money flows. And no one has a better view on that than BlackRock, one of the largest asset managers in the world with nearly $8 trillion in assets under management (AUM). A lot of those assets are in index funds and ETFs, via iShares, one of the largest ETF issuers on the planet. Salim Ramji is the Global Head of iShares and Index Investments for BlackRock, and he is our special guest on The Express this week. Thanks for being here.
Salim: "Thanks Caleb for having me. I'm really looking forward to it. I've been a fan of your show."
Caleb: "Well you're just out with your third annual report on investor progress. There are some big numbers in there, and it was a very interesting dynamic, and kind-of a debilitating year for investors in 2022. Give us some of the highlights. You have so many products out there—what surprised you and what are some of the highlights of the report?"
Salim: "What's really surprised me—I mean, this year is ending not like it started. And it's been one of the most difficult years on record for our 35 million clients all over the world, with stocks and bonds both down by double digits at the same time. And there's a lot of reasons for that, whether that's inflation, whether that's an energy shock, whether that's a war in Europe. But, it's been a tough year for investors all over the world. And I think the things that are surprising, that investors all over the world are really turning to ETFs as their investment vehicle of choice."
"And so, when we look at flows in ETFs globally, there's something like $800 billion, and that's closing in on the second-best year on record for ETFs. Our own flows within iShares are north of $200 billion. And what we're finding is that investors from all over the world are turning to ETFs, even in times of volatility, and even in times of market stress. And that's been, I would say, a really reassuring and pleasant surprise given all the things that happened in the market this year."
Caleb: "Yeah, $120 billion of that went into bond ETFs, of that $222 billion you took in. So there is money flowing pretty healthily throughout the year, but still, that's only 2% of the total fixed income market—that $120 billion in ETFs. So there's probably room for growth there. And in a year like the one we're facing in 2023, with thoughts of a recession, an economic slowdown, compressed profit margins due to rising interest rates—do you feel like we're going to see a lot more flows into bond ETFs next year?"
Salim: "Yeah, I do. I mean, bonds are really back. And one of the—if you will—positive benefits of the corrections that have happened in the bond market has been that bonds are once again an income-yielding asset. And so, we're seeing wealth managers put them into model portfolios. We're seeing individual investors look to the yield in bonds, and even very short-duration bonds—even short-duration Treasury bonds are yielding some very nice income levels for investors."
"And so, we're really seeing bonds across the spectrum, whether it's Treasurys, corporate bonds, high-yield bonds, experiencing inflows. And we're seeing more and more investors looking to bonds as part of their portfolios, given that the yields are so much better than they have been in more than a decade."
Caleb: "Finally, there is an alternative, right Salim? We've gone years without it."
Salim: "Yeah, absolutely. And I think one of the—again—positive surprises, from an iShares and an ETF point of view, is that with all the volatility in the bond market, people are moving more towards bond ETFs as their way of getting access to the bond market. And so, we're at about $120 billion in inflows, and that's a record year for us, even with two weeks left to the end of the year. And we're very optimistic about what that could do into next year, the year after, and the like."
"You mentioned it's just 2% of the bond market. We expect, by the end of the decade, that there will be $5 trillion in bond ETFs, which is around three times the level that it is today. And even then, it would still only be about four or 5% of the total bond market. And so, we're really optimistic for the growth of bond ETFs."
"But part of the reason actually has a lot to do with the bond market itself, because sure, our competition is other ETF providers, our competition is sometimes active bond managers, but more and more, the bond market is modernizing through bond ETFs, and we're really looking at our competition as being the whole bond market itself. For us, that's a really, really exciting opportunity because it's changing the way in which bonds are traded, and the way investors are getting access to it."
Caleb: "For our listeners out there who aren't clear on the difference between buying a bond or buying a bond ETF, what's the key thing they need to keep in mind when they're thinking about adding that to their portfolio?"
Salim: "Well, first, buying a bond is still really difficult as an individual investor. We celebrated our 20th anniversary of the first bond ETFs that we launched here in the United States just a few months ago. And 20 years ago, even if you had to buy a single bond, people would be making multiple phone calls, haggling over price, and it was just a really expensive way in which to trade in, let alone being able to access a basket of bonds like you're able to do with an ETF."
"Today however, you can get hundreds or thousands of bonds in a bond ETF, so you can get diversification. You can get it for a really tight bid-ask spread. You can do it incredibly conveniently. You can buy the bond ETF commission-free on your phone, from the likes of Fidelity, and it's just way more convenient than it ever was in the bond market."
"That's why we think that, given the more antiquated nature of how bonds are traded—they're over the counter (OTC), they're much more opaque than equities—that bond ETFs are really bringing bonds into a much more modern era. And so, I think it has incredible benefits for individual investors, just because of the complexity for individuals in particular to gain access to the bond market. They're looking to the bond ETF as the great equalizer."
Caleb: "Stocks get a lot of the attention in financial media for sure, but bonds really run things around here. That's where the big money is. But let's turn to stocks for a second, because a lot of folks are talking about 2023 being a stock pickers' market, being an active managers' market, just given the challenges we're facing this year. So, make the case for equity ETFs, in conditions like the ones we're expecting to see in 2023."
Salim: "The great thing about equity ETFs is that they offer incredible choice. So certainly, when people think of equity ETFs, they naturally think of the most basic ones: the S&P 500 SPY, or our IBB ticker, for example. But we offer over 1,300 choices of ETFs, and 900 of those choices are equity ETFs. And so, you can get every single slice of the equity market, from broad-based market cap, to factors, to sustainable, to themes like electric vehicles."
"And I think that the benefit for someone building a portfolio is that you can gain access to themes, or factors, that do well in inflationary times. So if somebody building a portfolio wants access to value, we've got a whole series of value factor-oriented ETFs. If somebody wants access to different slices of the equity market that may ride a particular theme like electric vehicles—we offer that as well. And so more and more what's happening is that the lines between active and passive index investing are blurring."
"Most of our ETF flows this year, in the United States, have come from the active management of ETFs. They've come from big discretionary portfolio managers using ETFs as part of their models, using factor tilts, using tactical allocations, or being able to invest behind big themes like electric vehicles. And so I think this whole notion of 'active' and 'index', we'll look back on in a few years and say that was a quaint 20th century construct, and that what ETFs are really doing is blurring the lines, because of the choice that we can offer to all sorts of market exposures, even in equities."
Caleb: "So many ETFs out there, and the industry just continues to grow year after year. Obviously, iShares is a big part of that. You have over 2,500 ETFs and mutual index funds. Listeners will know we just had Burton Malkiel, the author of A Random Walk Down Wall Street. He's a big index guy, but he and Jack Bogle—rest in peace—were always saying that there's just too many funds out there—too many ETFs, too many index funds. Why do you think we need more? Why does iShares continue to put more out there? Is it a demand thing, or is it looking for niches in the market that are still yet to be tapped?"
Salim: "Well, I think it's both. It certainly is a demand thing, because if you look at broad-based market cap indices, which we call our core series, I think we have a sufficient amount of choice there. And we continue to try and make those more affordable, we continue to reduce fees, and it really has a simplicity and scale element to it."
"But for many of the other exposures that we have, whether it's in factors or sustainable or themes, or different countries and sectors, what clients are asking for is a greater ability to customize their portfolio, and a greater ability to look at slices of the market. And so what we're trying to do is expand that choice, because what it offers clients is the ability to customize a portfolio to fit their particular needs."
"Some clients may be very bullish on electric vehicles or advances in agriculture, and so they can use some of our thematic ETFs. Some clients may want to tactically allocate in or out of value exposure, and so they can use our factor ETFs. Now for a first-time investor, they may just want to invest in IVV and have a simple S&P 500 exposure. And so, we're always trying to balance choice and simplicity. For many individual investors, what they're really looking for is simplicity. We've got our core series, and that tends to suit them just fine."
"But for many other investors—and we count some of the largest wealth managers and some of the largest active asset managers as our clients—it's kind of a strange thing, but active asset managers are clients of iShares—what they're really looking for is exposure to different slices of the market to help with their own active portfolio construction. And so, that's what we're always looking at, asking ourselves "How do we maintain high-quality, diversified exposures to even more narrow slices of the market?""
Caleb: "Yeah, it's the Burger King market out there for investors. Have it your way—I guess that's what a lot of the ETFs and the ETF issuers are bringing to the market. Have it any way you want it and there's almost unlimited choice, or, you could just go plain vanilla and buy an index fund or buy an ETF that tracks the broader market. You're also offering ETFs around the world. You've got no minimums for ETF investing in the U.S., Europe, and Brazil. What's the pickup like in places like Brazil and Europe for this type of a product, which is not new to the U.S., but certainly not something that you see a lot of investors in other countries having exposure to as much?"
Salim: "Well, I think one of the most dynamic markets in the past few years has been Europe, and it's been dynamic because of the growth of digital wealth platforms. There is no Fidelity equivalent, there is no Charles Schwab equivalent, but there are dozens of mid-sized digital platforms in Europe, and many of them are increasing access to ETFs and commission-free ETFs."
"And I think one of the most exciting developments in Europe is the growth of ETF savings plans, which if you think about a country like Germany, which doesn't have a strong investing culture in the way the United States does—just a few years ago, only a few hundred thousand Germans were investing through ETF savings plans. Today, it's a few million Germans. Just over three million people are investing in iShares ETF savings plans, and they're putting away €100 or so every single month in a methodical, simple way to invest."
"We think that number is going to triple over the next five years, and we think more and more, it's not only growing our ETF business and it's not only growing some of these digital platforms out there, but it's really changing the investment culture in Europe from a savings culture to an investing culture. But it's doing it, we think, in this much better, more affordable, more diversified way, using ETFs."
Caleb: "The secret sauce behind ETFs is how precisely they track an index, a sector, or an investing theme. Right behind the scenes at BlackRock, at iShares, you have great technology—I think you call it Aladdin—and you have teams of people who are doing this millions of times a year. This is part of what is known as the creation and redemption in the ETF world. But for our listeners out there who aren't that familiar—you're the expert on this—you've been doing it for a long time—explain what's actually going on in this process to really understand how ETFs work."
Salim: "So our Chief Investment Officer (CIO) for all of our ETFs and index investing has this great phrase, which is that there's nothing passive about how we manage iShares and index investing. And when you look underneath the hood, her teams are doing millions of things every year exactly right, in order to basically replicate any one of the thousands of different indices that we track. And so, that requires people who have great investment acumen, and she's got a team of portfolio managers. It has great technology, so you can bring scale. It has precision engineering in it, so that you can do each of these millions of things exactly right, every single time."
"They're always looking at things like lending and trading and other aspects to be able to replicate that index. And so, it's a much more precise mechanism that I think people would appreciate. And the other feat of it is that we're always looking and working with our partners around what we call 'market quality', which is the liquidity of the ETFs. And I think one of the really interesting things—you talked about the bond market—one of the really interesting things is that last year was a record for us in terms of bond ETF trading all across the world, and this year is surpassing last year's numbers by 40, 45%."
Caleb: "Well, you're a product guy. You're running a pretty big division over there at BlackRock, but not necessarily putting money to work. But I know you have your eye on the markets right now. I'm wondering about your predictions for 2023 from a product perspective, but also just from a sentiment perspective. You guys watch money flow all the time. You see what's being bought and sold all the time and you know where demand looks like it might be. So what are you looking at when you look at 2023?"
Salim: "I really look at things through the lens of a portfolio, because most of what we do in iShares is through the lens of a portfolio. I think all of the corrections and volatility of 2022 gives investors a great opportunity to rethink how they're thinking about their portfolios. And there really are three things that we're looking at across portfolios worldwide.
"One is bonds, and I think bonds are back. The yield and the capability for income generation of bonds is quite unlike anything I've seen in the past ten years or so. And so, as a result, really looking at the income generation capabilities of bonds across the spectrum, whether it's in short-term Treasurys, investment-grade, high-yield, municipals, or the like."
"The second thing is, I expect that inflation is going to be elevated for a while. And there are many different equities that do well in an inflationary environment. We've had a decade or more of growth outperforming value—I expect that's going to change next year. And so, at least personally, I'm loading up on value. I'm a frugal bargain hunting person by nature, so I've always been waiting for value to come back. But I think this year, or next year, it really is going to come back in a big way. But really, equities that tend to do well in an inflationary environment, I think, are really important pieces of a portfolio."
"And the third piece is just providing some inflation protection, generally speaking, to a portfolio, because I think that an inflationary environment is most harmful to retirees. I think Margaret Thatcher called it the mugger of savers, and I think that's more acute for retirees. And so having some inflation protection in there, whether that's through TIPS or whether that's through other mechanisms like commodities—I think that's really important in your portfolio."
"So I think it's bonds, I think it's inflation-protected equities like value investing, and I think it's just some basic inflation protection, particularly if some of your listeners are retirees and living on more of a fixed income. I think those are really important aspects. And that wouldn't have been true four or five years ago if we were talking, but I think the environment's completely changed and I do think we're in the midst of a very different regime change. And it's how do you make your portfolio adapt to that."
Caleb: "Slow and steady wins the race. Maybe it's the year the tortoise beats the hare, or maybe it's a long period of time where the tortoise beats the hare. Well, we always like to ask our guests for their favorite investing term. Investopedia is a site built on our financial terms—a lot of folks know us for the definitions. What's your favorite investing term? I'm curious. I have some ideas, given what you've been doing in your career for the past 20 or 30 years, but what's your favorite?"
Salim: "My favorite is cost, and it's perhaps not the favorite term of the industry. It is a favorite of clients. And I'm not just talking about the cost of our investments. I think we're very proud of our ability to reduce fees, even in an inflationary environment, across iShares. But it's all the hidden costs—it's things like commissions, it's things like taxes, it's things like minimum investing. And I think one of the great values of ETFs and index investing is that it reduces the cost of the underlying investment, and it reduces the barriers—all of the cost barriers—whether that's commissions or minimum investments for investors."
Caleb: "Every penny matters when you're trying to achieve yield and alpha in this industry, and you guys know a lot about that. Salim Ramji, the Global Head of iShares and Index Investments for BlackRock, thanks so much for joining The Express."
Salim: "Thanks, Caleb. I enjoyed being here."
Term of the Week: January Effect
It's terminology time. Time for us to get smart with the investing term we need to know, this week. And this week's term comes to us from Kara Greenberg, our newsletter editor, who keeps all of Investopedia's newsletters running on time. Kara suggests the January Effect. And why not? It seems appropriate.
According to our favorite website, the January effect is a perceived seasonal increase in stock prices during the month of January. Market watchers generally attribute this rally to an increase in buying, which follows the selling that typically happens in December due to tax-loss harvesting and portfolio rebalancing, and we saw a lot of selling in December.
Historical data may support the idea of a January effect, with the month of January experiencing an average gain of 1% for the S&P 500 since the year 1950, but it doesn't always work out that way. In both 2021 and 2020, the S&P 500 was lower in the first month of the year.
Phenomena like the January Effect and the Santa Claus rally are fun to talk about in research, but they're not really useful indicators for long-term investors. I'll be buying stocks in January and every month this year, but deep down inside, I'm hoping the January effect comes true and spills over into February, March, and the rest of the year. Good suggestion, Kara. You've already got our socks and the hoodie, so we're going to find something special for you, for your suggestion this week.