Given the recent bouts of volatility, ETF investors should be thinking about ways to manage their downside risk as opposed to continued high return generation.
“I think that the conversation has changed from a return perspective to a risk managed approach,” Alex Pire, Head of Client Portfolio Management at Seeyond, Natixis Investment Managers, said at the Charles Schwab IMPACT 2018 conference.
“Most of the time, advisors are sort of shining light, if you will, for their clients and they’re really supposed to help their clients remove the behavioral biases that they might have to be sort of concerned about the market. So I think advisors are staying very calm. They’re understanding that volatility is just returning at this point in time. The conversation is certainly shifting to a more risk managed approach,” Pire added.
As a way to better manage potential market risks down the road, investors may turn to actively implemented quantitative strategies that try to provide better exposure to the changing market conditions. For example, Natixis Investment Managers provides actively managed Natixis Loomis Sayles Short Duration Income ETF (NYSEArca: LSST) and the Natixis Seeyond International Minimum Volatility ETF (NYSEArca: MVIN) that have adapted time-tested strategies into dynamic ETF strategies.
LSST is supported by Loomis Sayles’ global research platform, which combines top-down macroeconomic analysis with bottom-up security selection. The Loomis Sayles Short Duration Income ETF will try to achieve current income consistent with preservation of capital by investing in fixed-income securities such as bonds, notes and debentures, as well as other investments, with an average duration between one and three years.
When deciding which securities to buy and sell, Loomis Sayles will consider a number of factors related to the bond issue and the current bond market, including the stability and volatility of a country’s bond markets, the financial strength of the issuer, current interest rates, current valuations and Loomis Sayles’ expectations regarding general trends in interest rates. The active ETF managers will also consider how purchasing or selling a bond would impact the portfolio’s risk profile and potential return.
MVIN focuses on developed markets and try to generate long-term capital appreciation with less volatility than typically experienced by international equity markets – the minimum volatility approach helps diminish portfolio risk.
The international minimum volatility fund will utilize both quantitative and qualitative factors to identify securities with lower volatility and a reduce the ETF’s overall volatility relative to the developed international equity market. The fund managers will screen for volatility of each individual equity security and correlation of each individual equity security to all other equity securities i the investment universe of international developed stocks.
For more market-related commentary from Tom Lydon and other industry experts, visit our ETF Trends video category.