By ETF Trends
Equity market volatility tested investors’ nerves in 2018. Both the S&P 500 and Russell 1000 indexes finished the year with average annualized volatility of about 17 percent while that figure was closer to 23 percent for the tech-heavy Nasdaq-100 Index.
Relative strength, a momentum-based investing technique that compares a security’s strength to that of the overall market, can help investors weather turbulent market environments. Philadelphia-based Clark Capital Management Group, Inc. utilizes proprietary, quantitative relative strength models in evaluating over 200 exchange traded funds (ETFs).
Clark Capital’s process includes running 20,000 relative strength models to rank the ETFs in the firm’s selection universe. Mason Wev, a portfolio manager at Clark Capital, recently discussed with ETF Trends the firm’s relative strength strategies and where he sees some areas of opportunity for investors in 2019.
“The relative strength methodology identifies outperforming and underperforming market themes and aims to exploit these trends,” said Wev. “We would note that avoiding underperformers is as important as owning outperformers. We find that the methodology thrives when there are strong themes of leadership in global markets (such as sustained periods of upward or downward trends). Conversely, we find that relative strength may struggle when there are no clear market themes or market leadership.”
Why Now For Relative Strength
Clark Capital’s relative strength strategies are quantitative, which keeps human emotion out of the equation. That can be useful at times of elevated market turbulence and investor angst. Additionally, Clark Capital’s strategies go beyond finding ETFs displaying favorable relative strength traits. The firm also identifies securities with unattractive relative strength, steering investors away from those assets.
“In addition to what appear to be strong areas of the market, relative strength analysis also helps us to identify potentially weak asset classes in the market,” said Wev. “Our proprietary models help manage portfolio risk by signaling when to shift to safer sectors within the asset class, or to defensive asset classes.”
During the fourth-quarter broader market swoon, some defensive ETFs displayed attractive relative strength attributes, a point reflected by ETF inflows during the last three months of 2018. That theme is extending into early 2019 as funds such as the iShares MSCI USA Minimum Volatility ETF (Cboe: USMV) continue adding assets.
USMV, the largest US-listed low volatility ETF, is among the funds used by Clark Capital. The low-volatility factor is based on the idea that low volatility funds can help cushion against market turns, limiting drawdowns that investors experience while providing upside potential. Consequently, the low- or min-vol strategies may produce better risk-adjusted returns over the long haul, which has been backed by extensive academic research.
Going With Growth
Global economic growth is expected to remain solid this year, a trend that could provide a ballast for growth stocks and funds, such as the SPDR S&P 500 Growth ETF (NYSEArca: SPYG), to rebound. Clark Capital’s Wev noted large-cap growth and technology are among the segments bouncing back early this year. The $3.50 billion SPYG, which tracks the S&P 500 Growth Index, allocates almost a quarter of its weight to technology stocks.
Risks such as fading fiscal stimulus and tighter monetary conditions are on investors’ minds as 2019 moves along, but Clark Capital’s relative strength strategies are poised to thrive amid those uncertainties.
“These risks should define the economic backdrop this year,” adds Wev. “However, we don’t think that these dynamics will end the current economic expansion, and we don’t see a recession on the horizon. The fourth quarter correction made valuations at least closer to long-term medians, which reduces the risks of another similar downturn.”