Given the current certainties and market risks, ETF investors should construct resilient portfolios to participate on any further upside and hedge the downside.
On the recent webcast (available On Demand for CE Credit), Potential ETF Strategies for Today’s (and Tomorrow’s) Markets, Sylvia Jablonski, Managing Director and Institutional ETF Strategist for Direxion and Portfolio+ ETFs, outlined a number of global elements that may influence an investor portfolio, such as the U.S. economy entering late-cycle phase, the Federal reserve moving toward monetary policy normalization, rising interest rates, building inflationary pressures, increasing dispersion amongst sectors, and changing geopolitical climate.
“If you’re an investor, you have to believe that markets generally rise over time. But of course there are from time to time, periods of high volatility. They’re relatively infrequent and short-lived,” Jablonski said.
Investors will no longer experience the smooth sailing of yesteryear. John Davi, Founder and Chief Investment Officer of Astoria Portfolio Advisors, pointed out that Astoria has already implemented hedges to limit potential swings in risk assets as the year progresses.
“Without question, the easy money has been made in this cycle. Astoria hedges risk assets and increased our hedges as the year progressed,” Davi said.
“We see a lot of recession checklists being produced,” he added.
How to Limit Potential Risks in Overheating Economy
Consequently, Astoria has been advocating hedging and liquid alts in a diversified portfolio as a way to limit the potential risks that the economy is overheating, especially after measures like an enormous tax cut and fiscal stimulus in the late stages of an economic cycle.
“Trump’s boom or bust presidential style volatility needs to be modeled and accounted for. If anything, Trump pulls recession risks forward,” Davi said.
Jablonski explained that many typically see themselves as a strategic, long-term investor, but there may be opportunity in intermediate-term, slower moving investment themes over the mid- and short-term. Consequently, she explained that ETF investors may consider solutions, depending on their situation.
For example, investors can look to a relatively new family of ETFs, called Portfolio+ ETFs, which can potentially enhance a bullish stance by providing 25% added daily exposure to popular broad-based indexes targeted by advisors. The ETFs include the Portfolio+ S&P Mid Cap ETF (PPMC), Portfolio+ Developed Markets ETF (PPDM), Portfolio+ Emerging Markets ETF (PPEM), Portfolio+ Total Bond Market ETF (PPTB), Portfolio+ S&P 500 ETF (PPLC) and Portfolio+ S&P Small Cap ETF (PPSC). The Portfolio+ ETF seek 125% of the daily performance of their benchmark indices, which may help provide magnified returns in order to generate outperformance over time.