Best Alternative ETF Strategies as Markets Mature

As U.S. markets mature and volatile rears its ugly head again, investors may want to look at alternative ETF strategies for options that may zig if traditional assets zag.

On the recent webcast, Beyond Factor Fundamentals – Are You Ready to Zig if Traditional Assets Zag?, David M. Lebovitz, Global Market Strategist for J.P. Morgan Asset Management, painted a rosier global economic environment with improving Global Purchasing Managers’ Index that indicate growing strength and rising year-over-year headline inflation in response to the growth.

Consequently, Lebovitz warned of tightening Federal Reserve monetary policies ahead to head off a potentially overheating economy, especially with unemployment rates at 4.1% and real GDP at 2.5% as of the end of 2017, along with rising inflation expectations for the years ahead.

A tighter monetary policy or rising interest rates ahead does not mean an end to bull market. Lebovitz pointed out that when benchmark 10-year Treasury yields are below 5%, rising rates have historically been associated with rising stock prices.

Nevertheless, that does not mean there won’t be bumps along the way. Lebovitz also showed that the S&P 500 has experienced average intra-year declines of 13.8 over the 38 year period ended 2017. As volatility returns to normal, there is still meaningful intra-year declines even during positive market environments.

“The combination of normal equity volatility with the possibility of rising interest rates raises the importance of incorporating strategies that provide true diversification within a total asset allocation,” John Lunt, President of Lunt Capital Management, said. “It is important to lower to dependence on traditional equity and fixed income within an allocation.”

Specifically, investors may consider hedge fund-esque strategies as an alternative investment strategy to diversify a traditional equity and fixed-income allocation. Looking at data for the past 15 years ended 2017, HFRI Indices, broadly constructed indices designed to capture the breadth of hedge fund performance trends across all strategies and regions, have outperformed both the benchmark S&P 500 and Bloomberg Barclays U.S. Aggregate Bond Index during drawdowns. During S&P 500 down months, the HFRI averaged -1.1% dips, compared to the S&P 500’s -3.4% average declines. During periods when the Barclays Agg pullbacked, the HFRI averaged positive 0.3% returns, compared to the Barclays Agg’s -0.7% fall.