With the ETF structure continuing to perform how it is supposed to, it’s never a bad time to check-in. ETF Trends CIO and Director of Research, Dave Nadig, appeared on TD Ameritrade Network on Wednesday to speak with “Markets In Motion” host Nicole Petilides about how volatility is affecting long term investors, let alone the status of ETFs.
In regards to how ETFs have done, as Nadig states, the structure has performed as advertised, with record daily volumes throughout the big swings in March and April. Whether that’s for a long term investor looking for a low-cost beta that can be re-balanced once a quarter, or if it’s a daytrader looking for an opportunity to take advantage of momentary market mispricing, the trick is figuring out the right ETF for the intended goal.
Yes, there was and still are some bond ETFs seeming to trade at first at discounts, and now at premiums, thanks to the Fed, but that really just highlighted how bad the bond market is, and how broken net asset values are for bonds.
Switching gears to some ETF picks, Nadig mentions the Vanguard Mega Cap ETF (MGC) and Direxion’s Russel Large Over Small ETF (RWLS). They are for long-term investors looking to stay invested in the market. It’s difficult for those responding to volatility, as there’s been a big disconnect between large cap and small cap stock. That’s where these ETFs come in.
MGC is essentially the top half of the S&P 500. There’s more weight in tech, health care, and some consumer staples names that have done quite well through this. Investors get big allocations into Microsoft (MSFT), Amazon (AMZN), Apple, Facebook, etc. and that’s been working well, as MGC is beating the S&P by 1.5% year to date.
RWLS shorts out 50% exposure to the R2000 and then goes 150% long the R1000. It’s currently beating the S&P by over 6% so far year to date.
As for some general market thoughts, while Nadig is skeptical of April’s bounce off the March bottom, people are just starting to see the real economic impacts of the global lockdown. Nadig does not believe the market is pricing in how bad the numbers are going to be. Right now, investors are seeing an appropriate response today, but Nadig feels everyone should go lower for longer. The volatility that’s been seen makes that more true than ever.
What was seen at month-end was the expected rebalancing in ETFs — over the 2-3 days of month-end when most advisors rebalance, and there were substantial outflows from bonds and inflows into equities, mostly in the cheap beta type of ETFs (SPY, AGG, etc.). Investors who hung in there, and did it were rewarded by a nearly 10% return off two weeks of performance.
So what should investors who are trying to stay long buy? Believers in the emerging story of “big firms win” (because of quality, cash, etc) then they can look to the mega caps or the large over small ETF Nadig has picked out this week.
As far as when things turn around, Nadig makes it clear, “We need to have clarity on what the real impacts are. It’s not that we have to be out of the woods. It’s not that everything has to be back to normal. However, we need to have more clarity on the medical side and the economic side. I think that’s a full quarter from now, and it’s going to be a bumpy 90 days.”
Watch Dave Nadig Break Down Mega-Cap ETFs On TD Ameritrade:
— TD Ameritrade Network (@TDANetwork) April 15, 2020
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