Defensive and Offensive ETF Strategies for Today’s Market Environment

Exchange traded fund investors can consider an investment approach that allows them to combine exposure to long term growth opportunities with a defensive equity hedge that has proven results.

In the recent webcast, Combining Defense & Offense to Help Conquer Today’s Markets, Dan Cupkovic, Director of Investments, ARGI Investment Services; and Christian Magoon, Founder and CEO for Amplify ETFs, highlighted offensive and defensive equity investment strategies that investors can use to capture rising growth trends in the markets while hedging against ongoing risks that could topple the record rally run.

Specifically, the strategists pointed to a rising growth opportunity in online retail or e-commerce.

“Online retail was already the fastest-growing segment of retail,” the strategists said, “but COVID-19 has accelerated this trend in the new work/shop-from home economy.”

According to the U.S. Department of Commerce, 16.1% of U.S. retail sales were derived from online retail in the second quarter of 2020. This was a 45% increase in online retail as a percentage of overall retail from 2019. To put this in perspective, e-commerce shopping levels during COVID-19 lockdowns from April through May accounted for $153 billion, compared to the 2019 holiday season from November to December of $142 billion.

While the e-commerce segment enjoyed their new windfall, traditional brick-and-mortar retailers suffered from the sudden plunge in foot traffic as more consumers were forced to stay home. In 2020, 26 retailers have already filed for bankruptcy.

“The effect on brick-and-mortar retailers is clear – adapt or falter,” the strategists said. “Certain large brick-and-mortar retailers are building out their e-commerce platforms, but it is still a small percentage of their overall revenue.”

Something like the Amplify Online Retail ETF (NasdaqGM: IBUY), which tries to reflect the performance of the EQM Online Retail Index, can provide exposure to global equity securities of publicly traded companies with significant revenue from the online retail business. IBUY, the first ETF explicitly focused on the online retail segment, has been a popular thematic play that targets companies that generate at least 70% of revenue from online or virtual sales. As the market environment shifts and changes, investors may also have the opportunity to capitalize on the growth potential of the e-commerce segment. The index methodology is designed to result in a portfolio that has the potential for capital appreciation.

IBUY has an international counterpart, the Amplify International Online Retail ETF (NYSEArca: XBUY). XBUY is an index-based ETF that takes on foreign companies or those outside the U.S. that are expected to benefit from the increased adoption of e-commerce around the world. It’s not just the U.S. online retail segment that’s growing. About 74% of total online retail sales in 2019 were generated from countries outside the U.S.

Looking ahead, the strategists argued that we might expect record-breaking online retail holiday sales this year due to the ongoing coronavirus fears. Online retail market-share could expand to mid-20% as a percentage of total retail sales. Meanwhile, we may continue to witness increased physical store closures due to the lower consumer foot traffic, along with greater merger and acquisition activity as the industry consolidates.

On the other hand, the strategists warned of potential risks, such as the ongoing COVID-19 concerns, a new trade war with China, and political risk from the upcoming presidential elections, which could trigger another market downturn and cause a spike in volatility. Market pullbacks and periods of heightened volatility are not something new, even during a bull market. For example, during the 2009 through 2020 bull market, the markets experienced major sell-off events, such as the 2010 flash crash.

Looking at historical data from 1941 to 2018, the probability of Market Loss (CRSP value-weighted S&P 500 Index) of -10% had a 33% probability of occurrence, and a -20% Market Loss had a 19% probability of occurrence.

For those seeking to defend against potential hidden disruptions that could throw the market into another volatile bout, Amplify BlackSwan Growth & Treasury Core ETF (SWAN) can be a good risk management strategy to diversify a portfolio. The Amplify BlackSwan Growth & Treasury Core ETF seeks uncapped exposure to the S&P 500 while buffering against the possibility of significant losses. Approximately 90% of SWAN will be invested in U.S. Treasury securities, while approximately 10% will be invested in S&P 500 LEAP Options in the form of in-the-money calls. SWAN seeks investment results that generally correspond to the S-Network BlackSwan Core Total Return Index.

The strategists explained that a “black swan” event is an unpredictable occurrence that is beyond what is normally expected of a situation and has potentially severe consequences. Black swan events are characterized by their: extreme rarity, severe impact, and the widespread insistence they were obvious in hindsight. Previous black swan events include Black Monday in 1987, the Asian Financial Crisis in 1997, the Dot-com Bubble in 2000, the 9/11 terrorist attacks in 2001, the financial crisis of 2008, and the recent COVID-19 pandemic.

The Amplify BlackSwan Growth & Treasury Core ETF is not a “tail risk” strategy that takes losses in good markets and only does well in down markets, and it is not an active strategy relying on triggers and trends. SWAN is a simple yet powerful strategy owning two inversely-correlated asset classes: Treasuries and equities. The fund is a rules-based, passive methodology, backed by academic whitepaper, and it is designed to be fully liquid any trading day, with a quarterly income distribution schedule.

The BlackSwan ETF can be used in a core equity portfolio to hedge against significant downturns, provide equity income, or act as a bond alternative due to is bond exposure and potential growth.

Financial advisors who are interested in learning about defensive and offensive ETF strategies can watch the webcast here on demand.