As the market waves tumble and churn, ETF investors can look to a dynamic alternative strategy that can deftly navigate the changing conditions.
Specifically, investors can look to a fund like the recently launched AGFiQ Dynamic Hedged U.S. Equity ETF (USHG) to diversify a traditional portfolio with alternative market exposures.
The AGFiQ Dynamic Hedged U.S. Equity ETF provides access to a diversified portfolio of U.S. equities, while seeking to provide long-term capital appreciation with lower volatility using embedded downside risk management which seeks to protect capital. The ETF offers exposure to the long-term growth potential of U.S. equities using a multi-factor approach designed in an effort to have lower volatility and better risk-adjusted returns relative to the market through its use of a dynamic hedging model.
“We think a 10% to 15% allocation to alternative strategies makes sense going forward,” Bill DeRoche, Chief Investment Officer & Portfolio Manager at AGF Investments LLC, told ETF Trends in a call.
DeRoche said a dynamic risk hedging strategy such as USHG is “able to create more risk-controlled results.”
“You give up some upside to better manage the downside,” he said.
The actively managed USHG operates as a fund-of-funds investment vehicle that invests primarily in sector-based ETFs and other ETFs with a focus on U.S. equity exposure. The managers also employ proprietary, multi-factor quantitative models that use fundamental factors and market risk measurement factors to help establish allocation to primary sectors of the S&P 500 Index.
The sector allocation model is based on factors like size, valuation, momentum and quality. The sector model uses a multi-factor approach and considers all S&P 500 sectors but is not expected to generally emphasize any particular factor, valuation method or sector.
The market risk model analyzes market and macro-economic data to help the portfolio managers identify the equity risk level.
During down market conditions the ETF will also implement risk controls to protect capital in periods of falling equity markets while providing potential for outperformance in up markets. To seek to provide risk controls in down markets, USHG invests in the negative-beta AGFiQ U.S. Market Neutral Anti Beta ETF (BTAL), an ETF that is also managed by AGF Investments and may also invest in similar lower beta ETFs available in the marketplace, along with cash equivalents.
The portfolio managers intend to increase allocations to lower beta ETFs like BTAL within the portfolio at times when they believe equity market risk to be high or rising, and they will decrease exposure to these lower beta exposures when equity market risk levels are estimated to be low or falling.The Fund’s allocations to lower beta ETFs is anticipated to fluctuate but typically range from 0% to 50% of net assets. As of the end of May, BTAL made up 20% of USHG’s underlying portfolio
The AGFiQ Dynamic Hedged U.S. Equity ETF provides a similar risk-to-return profile that comes with a traditional 60/40 stock and bond portfolio but with slightly better return characteristics, “providing investors with small drawdowns and participate in the upside,” DeRoche explained.
For more alternative investing strategies, visit our Alternatives Channel.