Looking at where the Nasdaq stands, being both up 2% today but also down 27% YTD, VettaFi’s Financial Futurist, Dave Nadig, was on hand on Yahoo Finance’s “ETF Report” to discuss how he believes this market evolution will impact ETFs in general.
On a general basis, Nadig notes that ETFs have held up wonderfully, as that’s the nature of their structure. With that in mind, when there are market downturns, such as what’s going on currently, investors do tend to change things in their portfolios.
Speaking with advisors to collect their opinions on the matter, VettaFi’s polls show that over half have been looking to get into alternative asset classes, something other than just more stocks and bonds. “51% said they were looking to move into an alternative asset class, which, frankly, we found surprising,” Nadig reports.
“Having some bond allocation can work for you,” @Vetta_Fi Financial Futurist @DaveNadig says. “As we start going into a rising rate environment, it actually makes sense to start legging in as those higher coupon rates become available.” pic.twitter.com/1SGdWk1xYb
— Yahoo Finance (@YahooFinance) May 25, 2022
Looking into these alternative asset classes, as far as the opportunities go, Nadig notes how there’ve been a couple of different approaches. For example, there’s the idea of return stacking, which uses something to provide more room in a portfolio so that diversification can really matter.
The ETF that many are using for this cause is the WisdomTree Capital Efficiency ETF (NTSX), which is basically a 90/60 portfolio – 90% stocks, 60% treasuries, using futures to provide a bit of leverage. This is not to take more risks but to create room in the portfolio and put less into that 60/40 to open investors up for true alternatives.
On that alt space, commodities have really been a go-to destination as well. Many flows and interests have gone here, particularly in Invesco’s Optimum Yield Diversified Commodities ETF (PDBC), which is up around 35% this year, and that’s been a core allocation.
“Another thing we’ve been looking at,” Nadig continues, “A managed futures approach, an actively managed approach that can look at things like going short the yen or short the euro through futures.” He points out the fund, the iMGP DBi Managed Futures Strategy ETF (DBMF), which is up about 21% this year. This and PDBC will provide non-correlated returns, which is the most important thing when building a long-term portfolio.
Are We Counting 60/40 Out?
When asking if the 60/40 rule is just no longer, Nadig notes that there’s been an era where there hasn’t been an alternative. It’s been a decade of wanting to be in equities. Over the long term, however, people want to come back to a more diversified approach.
Nadig adds, “It’s been very clear in this last quarter that having some bond allocation really can work for you. And as we start going into a rising rate environment, it actually makes sense to start legging in as those higher coupon rates become available.”
It may not mean running back to the old-fashioned 60/40, but the idea of getting that extra diversification has a lot of investors learning the hard way, currently.
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