An Alternative ETF Strategy to Help Investors Smooth Out the Ride

The markets can quickly drop like an escalator, and it is essential to include something to buffer that drop. Investors can also incorporate a hedging exchange traded fund tool to diversify risk better and mitigate the potential falloff in the markets.

As a way to better manage potential drawdowns, investors can look to a negative-beta strategy like the AGFiQ U.S. Market Neutral Anti Beta ETF (BTAL) 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.

“Most people recognize that when the market goes down, volatility tends to spike. The portfolio is long low-beta securities or low-risk securities. It’s short the high beta names. So, as a result, when that volatility spikes and the market’s going down, that spread really widens. Now, what it takes advantage of is this asymmetry,” Bill DeRoche, Chief Investment Officer, AGF Investments LLC, said at the Inside ETFs conference.

What’s Behind BTAL

The AGFiQ U.S. Market Neutral Anti Beta ETF tracks an equal-weighted index that takes long positions in low beta US stocks offset by short positions in high beta US stocks. It provides consistent exposure to the anti-beta factor by investing in the underlying index, which reconstitutes and rebalances monthly in equal dollar amounts in equally weighted long low beta positions and equally weighted short high beta positions within each sector.

BTAL is a risk-diversifier, so with after-market corrections, because of those innate protections in place within the ETF strategy, an investor will not have gone down as much in the recent broad market pullback. Less risk ends up benefiting the portfolio, and the investor will have more wealth as well. Additionally, investors will be able to build more wealth, going forward, because they’ll be starting from a higher level.

The market-neutral anti-beta strategy is considered an alternative investment and, as such, can act as an essential portfolio diversifier and an avenue for reducing correlations. While not zero, BTAL’s correlations to broader benchmarks, such as the S&P 500, are low relative to pure beta instruments.

Watch Bill DeRoche Discuss BTAL:

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The opinions and forecasts expressed herein are solely those of Max Chen, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.