As investors rebalance and adapt portfolios in response to the recent volatility, ETF investors should aim to create and maintain an efficient portfolio to generate ample returns, using a process that is dynamic enough to manage even the most extreme market conditions.
On the recent webcast (available on demand for CE Credit), Today’s ETF Portfolio Strategies For Long-Term Portfolio Construction, Andy O’Rourke, Managing Director and Chief Marketing Officer for Direxion and Portfolio+ ETFs, outlined a number of concerns that have gripped the markets today, including rising rate risks, inflation fears, Facebook’s data breach and the technology sector meltdown, and talks of a trade war.
“These are all potential concerns, but there is still plenty of reason to be optimistic about the markets,” O’Rourke said. “In other words, we expect the volatility to calm down at some point soon,”
When building a long-term investment portfolio, investors will have to consider the amount of risk they are willing to take on to justify the amount of returns they hope to achieve.
However, Tom Hardin, Founder and CEO of Canterbury Group, pointed out that playing it conservative has not always helped investors over the long-run. For instance, from 2000 to 2017, Hardin showed that a buy-and-hold investor only made money a total of 3.6 years over the past 17 year period as market swings more or less washed out overall returns and it was only the past few years that an investor made money.
Related: Levered, Inverse ETFs to Empower Financial Advisors
Investors may also even consider actively managed strategies to help generate alpha or outperformance. However, O’Rourke warned that many active managers have underperformed their benchmarks. Over the past 15 years, around 80% or more active fund managers across the various asset categories have been outperformed by their benchmarks, so passive index-based funds would have been a better long-term play for investors.
Alternatively, if one believes markets generally rises over time with periods of short-term volatility, consider the new line of Portfolio+ ETFs that may help enhance long-term exposure.
The so-called Portfolio+ ETFs can potentially enhance a bullish stance by providing 25% added daily exposure to popular broad-based indexes targeted by advisors, including 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) – formerly Direxion Daily S&P 500 Bull 1.25X Shares, and Portfolio+ S&P Small Cap ETF (PPSC) – formerly Direxion Daily Small Cap Bull 1.25X Shares.
The lightly leveraged solutions can be applied to common asset allocation strategies to seek greater upside potential over time. If investors believe that a portfolio offering 100% exposure to the markets is good, it stands to reason that a portfolio with 125% exposure can be better, even after full consideration of the potential risks.
Hardin also argued that lightly leveraged ETFs help offset the negative impact of volatility on compounded returns and help maintain a consistent percent benefit of diversification.
A strong bull market without long interruptions and relative low volatility can also help maintain positive gains in the lightly leveraged ETF. Compounding effects due to rebalancing can benefit leveraged ETFs in a upward-trending market. In an upward-trending market, compounding can generate longer-term returns that are greater than the sum of the individual daily returns. Similarly, in a downward-trending market, compounding can generate longer-term returns that are less negative than the sum of the individual daily returns.
Furthermore, these types of lightly leveraged ETFs may help investors free up assets to invest in other areas. Due to their 125% leverage, an investor would need to allocate less capital to achieve the same amount of 100% exposure to a market, which leaves extra cash available to be deployed in other non-correlating asset classes to seek greater portfolio diversification.
Financial advisors who are interested in learning more about portfolio construction can watch the webcast here on demand.