We last updated the MoneyWeek ETF portfolio in July, when we added one new position, bringing in WisdomTree True Emerging Markets (LSE: WEMP) to balance the growing technology tilt in our long-standing iShares Core MSCI Emerging Markets (LSE: EMIM) position.
We now have 15% in emerging markets, which sounds high – but the Korea and Taiwan element (which is around 50% of EMIM) is now a play on the AI investment cycle to such an extent that it no longer seems to make sense to think of them as subject to the classic emerging-market trends. Combined, we have about 10% in emerging markets and about 5% highly geared to AI capex. The latter is something to keep in mind if the AI boom ends and we want to cut exposure.
There has been plenty of volatility since then in geopolitics and in markets, especially in bonds. However, most of these developments have had relatively little bearing on the portfolio because we were already positioned cautiously towards them. For example, our bond holdings are very short-dated, precisely because we were concerned about the risk of longer-term yields getting untethered.
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That said, our real-estate holding Xtrackers FTSE Developed Europe Real Estate (LSE: XDER) is struggling. Higher energy costs, higher inflation and higher interest rates over the medium term will harm sentiment and stall the wider economic recovery in general, while also pushing up refinancing costs and lowering valuations for this sector in particular. Four years from the point when rates began lifting off the floor, investors still seem to get rattled whenever they are reminded that today's rates are likely to be the new normal.
What we're changing in the MoneyWeek ETF portfolio
To my mind, there is value in European real estate – the number of takeovers in the sector (especially in the UK) suggests that trade buyers see opportunities where public markets don't. However, it's not at all clear when sentiment might change. We don't want to sell out entirely, but there is a case for taking it from 10% to 5% while we see how it develops. Like everything else in the MoneyWeek ETF portfolio, this is not a decision made in isolation: when you look at the positions, we are at the top end of medium risk at a time when caution may be wise.
We could consider adding a fund like iShares Global Infrastructure (LSE: INFR). There is much going on in this once-sleepy sector (see issue 1320). That said, this is also selling off as long bond yields rise. For now, what stands out is that the underlying bonds in iShares $ TIPS 0-5 GBP Hedged (LSE: TI5G) offer a 2.8% real yield with limited interest-rate risk at a time when higher inflation is a growing threat. So we will temporarily add 5% from XDER plus the remaining 5% from our uninvested cash to this, taking it to 20% in total.
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