Bill DeRoche On Using ETF 'BTAL' As Insurance

In considering alternative strategies for 2020, AGF’s Chief Investment Officer Bill DeRoche spoke with ETF Trends about the effect AGFiQ US Market Neutral Anti-Beta Fund (BTAL) is having.

This fund provides an impressive portfolio given its use of a negative beta, making BTAL an insurance project. The idea behind it is to get rid of some of the upside to hedge a lot of the downside. People can find concern with this, but AGF looks at how it’s a late business cycle and do not believe it’s a risk-on type of environment.

At this stage, AGF thinks more about playing defense over getting aggressive. From their perspective, having a little insurance in the portfolio is excellent. There’s no suggestion to be against the equities market, but there does seem to be an asymmetry in how there’s more downside risk than upside potential.

“From that perspective, having a little bit of this insurance product makes a lot of sense at the end of the day,” DeRoche states. “In particular, a lot of the other alternative products are much more about return enhancement.”

“And we think those make a lot of sense if you’re in a more risk-seeking environment. But, from our perspective, this isn’t a risk-seeking environment. It’s more about good defense protecting all the gains you’ve been able to accumulate over the last decade.”

A Client Suggestion

It’s the suggestion going out to clients. As explained by DeRoche, the portfolio has a negative beta associated with it. It’s a long-low beta, short-high beta, and the investment premise is predicated on the proven idea that when markets go up, volatility tends to compress.

As a result, the high beta names go up a lot more than the low beta names. However, because of the low volatility, the spread between the two is relatively small.

What matters more is when the market goes down. The drops become much more significant, especially for the high beta names. Which is all the more reason to look to this insurance portfolio for bigger benefits.

Related: AGFiQ’s Alternative Approach to Investing With ‘BTAL’ ETF 

“Lately, low volatility has been outperforming high volatility, which is unusual. So, as a result for people that have actually put this trade on for over the last 12-15 months, they’ve actually been able to do it from a costless perspective,” DeRoche notes.

Usually, the underperformance experienced is in an up-market, but low volatility has actually done better than high volatility, and while there’s no expectation for that to continue, it’s been a benefit for those who have added the trade over the last year.

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