The markets roiled in August, but alternative exchange traded fund strategies that zig while equities zagged helped investors offset some of the risk.
The markets are trading in the same direction more frequently than normal or tracking in a lock-step movement that some warn is contributing to the heightened volatility and could fuel wider swings in the future, the Wall Street Journal reports. For example, the S&P 500’s 11 sectors have either increased or declined together during 11 trading sessions in August, the highest monthly incidence of such lock-step moves since January 2016.
Further fanning fears, market observers have witnessed signals of a U.S. recession based on economic data points like a yield inversion, and uncertainty over the U.S.-China trade war has added to the large market swings.
“It really is almost like an ongoing, rolling bet on the odds of recession,” Dave Donabedian, chief investment officer at CIBC Private Wealth Management, told the WSJ. “If you’re a stock picker, that’s frustrating.”
“We expect more rate cuts from the Fed, and even more creative accommodation coming from the [European Central Bank], Bank of Japan and People’s Bank of China,” Donabedian added.
Weighing on diversified portfolios, a number of various asset classes are also moving largely together. Oil prices, international shares and bond yields have traded in the same direction as U.S. markets seven times this month, according to Dow Jones Market Data, as trade policy fueled fears of an economic slowdown overseas that could affect the U.S.
“It’s very difficult to gauge where things are going,” Candice Bangsund, a portfolio manager at Fiera Capital, told the WSJ. “Sentiment remains extremely fragile.”
Nevertheless, investors can still look to alternative strategies that exhibit low correlations to traditional assets as a way to better diversify a portfolio.
“It’s a lot for investors to digest,” Emily Roland, co-chief investment strategist at John Hancock Investment Management, told the WSJ. “Our suggestion has been that investors probably need to adapt to this type of macro volatility and do what they can to not get whipsawed by these shifts that we’ve seen.”
For example, the AdvisorShares Dorsey Wright Short ETF (NASDAQ: DWSH) strengthened by12.1% over the past month while the S&P 500 declined 3.0%. DWSH scours the markets for underperformers and short sells securities that demonstrate the highest relative weakness. Securities selected will primarily be large-capitalization U.S. equities, consisting of a short equity portfolio with about 75-100 holdings that begin with a modified equal weighting. When capital markets experience a downturn, DWSH’s strategy can allocate its short exposure more broadly to the domestic equity market – by shorting individual ETFs or futures contracts – seeking to enhance its total return and effectively hedging long equity exposure.
As a way to better manage potential drawdowns ahead, investors can look to a negative-beta strategy like the AGFiQ U.S. Market Neutral Anti Beta ETF (BTAL), which gained 8.7% over the past month, to better hedge risks. BTAL acts as a type of long/short strategy that goes long low beta stocks and short high beta stocks. Consequently, the ETF strategy can produce positive returns any time low beta outperforms high beta.
The WisdomTree Dynamic Bearish U.S. Equity Fund (DYB) seeks to track long equity positions or long U.S. Treasury positions and short equity positions. The long equity positions includes approximately 100 U.S. large- and mid-capitalization stocks and are scored based on fundamental growth and value signals. Stocks are also weighted according to their volatility characteristics. The short equity positions include the largest 500 U.S. companies, weighted by market capitalization, designed to act as a market risk hedge. The fund rose 3.7% over the past month.
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