In an investing environment that — by most measures — is becoming increasingly fearful, I emphasize ETF assets on the far left and far right of the risk spectrum. On the right, I will maintain an allegiance to funds like iShares USA Minimum Volatility (USMV), Vanguard High Dividend Yield (VYM) and SPDR Sector Health Care (XLV). They have given me little reason to cut back in that arena. I have even added a modest amount of stock risk to European exporters that might benefit from euro weakness via iShares Currency Hedged Germany (HEWG).
On the left, I remain dedicated to risk averse assets as I have throughout the prior 14 months. Long duration treasuries have provided remarkable relative value in a world where inferior country debt offers less yield than U.S. debt. I continue to be long ETFs like Vanguard Extended Duration (EDV) and iShares 20+ Year Treasury (TLT). Taxable accounts have a variety of muni possibilities from iShares S&P National Muni (MUB) to Blackrock Muni Assets (MUA).
Perhaps most importantly, if a stock bear should be around the bend, I am able to use the FTSE Custom Multi-Asset Stock Hedge Index to my advantage. Not only did I join FTSE-Russell in creating the index that many are calling “MASH,” but I recognize the necessity of owning a diverse group of asset types to hedge against an extreme downturn in stocks. Long-dated treasuries, munis, gold, the Swiss Franc, the yen, the dollar, JGBs, German bunds, TIPS and zero coupons figure prominently in the index.
Nobody knows when a bear market will emerge. Yet failing to prepare for a catastrophic decline is the worst mistake an investor can make. If nothing else, investors should recognize that the collapse in commodities, never-before-seen lows in global yields and the rapid appreciation of the almighty buck are more indicative of “risk-off” money movement than “risk-on” excitement.