Finding the Right Investing Tools for Uncertain Times
For investors, the biggest risks often are those that are unforeseeable. But in uncertain times like these, there are specific strategies that can either help investors navigate to higher returns or protect their portfolios from potential landmines. A popular strategy to boost performance is to embrace multi-factor index funds that are designed to beat, rather than simply match, an index’s returns. One defensive tactic, for example, is to employ hedging strategies.
Still another strategy is to focus on investing in companies that have proven their mettle over the long haul. To that point, “One big theme to watch in 2017 is companies that are growing their dividends,” says Steve Cohen, managing director at ProShares.
In uncertain times like these, Cohen says, companies that have demonstrated their ability to consistently grow their dividends through all types of economic and market environments become even more appealing, because the ability to accomplish that feat shows resilience.
Investors, Cohen says, “are starting to appreciate the dividend-growth concept as an all-weather strategy that is able to identify quality companies, regardless of market conditions.”
In other words, ETFs that focus on dividend growers—ProShares S&P Midcap 400 Dividend Aristocrats ETF (REGL) is just one example—act as a useful screen for finding strong companies. “It’s really a strategy that ultimately tries to isolate blue-chip companies,” he says. An added benefit is that these types of products can still perform well in a rising-rate environment.
Multi-factor funds are a growing trend, as investors increasingly look for strategies that have the potential to outperform the market. ProShares Large Cap Core Plus (CSM) is one of the oldest multi-factor funds on the market, according to Cohen. CSM tracks the Credit Suisse 130/30 Large Cap Index, which screens stocks in the S&P 500 using 10 distinct equal-weighted factors, employing long and short positions to maximize performance potential. Cohen notes CSM has consistently outperformed the S&P 500 over time, earning a Morningstar 5-star rating.
Another useful tool in uncertain times is the strategic use of hedges. Consider this: for many investors, the go-to strategy in a rising-rate environment is to move into short-duration bond funds. Accordingly, such funds have experienced a spike in assets over the past year. Here’s what some investors may not realize: Short duration bond funds still carry interest rate risk. But there’s another way to manage the growing danger of rising interest rates: investing in products that hedge away that risk.
For example, the ProShares Interest Rate Hedged ETF (HYHG) invests in high-yield corporate debt while at the same time taking a short position in U.S. Treasury futures. The ETF aims for a duration of zero, which sums up to zero interest-rate risk.
“Even in a short-term bond fund, investors’ principal may go down—and can go down significantly,” Cohen says.
With interest rate-hedged products, investors can protect against that problem, but still benefit from the credit exposure of the bonds in the portfolio, in this case high-yield bonds, he says. In effect, these types of ETFs separate out interest-rate risk from credit risk.
Additional areas for investors to consider as 2017 unfolds, Cohen says, include rising volatility and potential growth in small- and midcap stocks. With regard to volatility, investors should consider looking to ETFs that trade on VIX futures, Cohen suggests. (The VIX index measures market expectations for volatility over the upcoming 30-day period.)
As for small- and mid-cap companies, why the enthusiasm? For one, it simply may be their time. “It’s been a pretty good era of large-cap outperformance and there’s always the reversion to the mean,” Cohen says. Also, according to some interpretations of the new administration’s policies, some small- and mid-cap companies may be helped more than they have been in recent years. “We saw a pretty good rally in small caps in the fourth quarter,” Cohen says.
ProShares has been at the forefront of the ETF revolution since 2006. ProShares now offers one of the largest lineups of ETFs, with more than $27 billion in assets. The company is the leader in strategies such as dividend growth, alternative and geared (leveraged and inverse). ProShares continues to innovate with products that provide strategic and tactical opportunities for investors to manage risk and enhance returns.
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