The ETF marketplace has become flooded with options as the popular investment vehicle continues to experience a wave of launches. Navigating all the choices and building strategies can be a daunting task for advisors, but representatives from VShares, Emles Advisors, and Dynamic Shares gave a webcast on both the challenges of the current economic cycle as well as active, dynamic strategies that are adaptable for variable markets, moderated by Lara Crigger, managing editor of ETF Trends and ETF Database.
Investing in Diversity
Mamadou-Abou Sarr, CIFD, co-founder, president, and CEO of VShares, opens with discussing ESG funds in the U.S. and how most are overweight to tech while being underweight to energy and utilities, a strategy that has worked fine up to this point but could prove difficult for investors as markets change.
At VShares, advisors and investors were often asking where the benefit in investing in diversity would be for them. “It can unlock performance value,” Sarr explains. “It can also help companies foster a strong culture, and a culture of innovation down the line.”
This culture of innovation leads to stronger performance by companies; last year, the ISS ESG US Diversity Index outperformed the Russell 3000 as well as the S&P 500 for returns (47.25% compared to 39.24% and 40.04%, respectively).
The V-Shares US Leadership Diversity ETF (VDNI) seeks to track the performance of the ISS ESG U.S. Diversity Index Total Return, a free-float market cap-weighted equity index that includes U.S. companies with broad representation across ethnicities and genders within the director pool and named executive officers (NEO).
Investing in Value
Nathan G. Miller, CFA, senior vice president, portfolio manager at Emles Advisors, next discusses the benefits to value investing and why it’s a good play going forward. Over long timelines, value investing has consistently outperformed the short-term profit-seeking trends, Miller asserts, no matter which measurement you use (P/E, FCF yield, EBITFA Multiple, and so on).
“Simply put, while popular strategies like chasing growth or buying innovative and disruptive stocks seems exciting, and it can work over short periods of time, one- or two-year periods of time, they lead to terrible long-term performance,” says Miller.
Value investing typically tends to be “significantly less risky” Miller explains, but can feel uncomfortable to buy into sometimes, as it generally involves stocks that are ignored, troubled stocks, or troubled sectors.
The Emles Alpha Opportunities ETF (EOPS) is an actively managed fund with the ability to go long or short and adjust those exposures depending on market environments. It’s an alternative strategy fund that seeks to mitigate the downside, and it leverages (upsizes) its core conviction through options. Through its use of options, hedges, shorts, concentrations, and exposures, the fund is able to navigate uncertain market environments as an actively managed ETF. Emles invests in small- and mid-cap companies that are undervalued compared to their normalized earnings.
Investing Around Volatility
Mark Downing, COO, chief product officer of Dynamic Shares, discusses volatility and explains that historical volatility is backwards-looking and measures price movements from the past, while implied volatility is forward-looking and looks to predict future price movements through options. When looking at implied volatility, the VIX is a standard measurement that investors use to try and predict future volatility; the VIX takes into account the option prices of the S&P 500 Index along with the weighted prices of the put and call options for the next 30 days on the index.
Downing explains that implied volatility is often greater than the realized volatility, which means that sellers of volatility are able to collect a volatility risk premium, the premium that investors pay when buying options that hedge their portfolios.
Because the VIX generally returns back to its mean, it’s possible to capitalize on the mean reverting behavior, maximizing when the VIX is above trend and minimizing exposure when it’s below trend. The Dynamic Short Short-Term Volatility Futures ETF (WEIX) seeks to approach investing around the VIX differently.
“Using mathematical models, WEIX aims to dynamically change its inverse exposure to the VIX, generally increasing that exposure as the VIX rises above its long-term average and decreasing it as it falls below its long-term average,” Downing explains. “Additionally, WEIX’s ‘stress mode’ uses market signals in an attempt to systematically decrease its inverse VIX exposure in highly volatile markets with the goal of preserving capital during those times of market distress.”
Financial advisors who are interested in learning more about hidden gem strategies can watch the webcast here on demand.