Make Risk Management the Prime Focus in 2019 With These ETFs

In 2017, warnings of volatility on the horizon was the key message from Seeyond-Natixis Investment Managers, which eventually surfaced in the fourth quarter of 2018. In 2019, the capital markets are seeing an environment where volatility has become normalized–acknowledging that it’s there, but not making rash decisions when it resurfaces.

That does not mean, however, that investors are comfortable with volatility. When severe market oscillations result in sharp downturns, it’s easy to get unnerved.

“Now, we’re pretty comfortable with the level of volatility that’s within the market,” Alex Piré, Head of Client Portfolio Management, Seeyond. “We believe that’s going to be a trend, but there’s a lot of pain behind even having more normalized volatility.”

Just prior to the fourth-quarter volatility shower investors got last year, the extended bull market was at its peak. It was a time when a throwing-darts-on-a-board strategy was actually providing gains, but investors now realize that 2019 requires a more strategic bent.

“Now you’re in this environment where we still believe the market will regain a little bit of its momentum–we’re looking at probably a 5 to 8 percent return for the year,” added Piré.

“A lot of back and forth–one of those sideways markets,” Piré said.

Upside Potential with Downside Protection

Piré reminded investors that this foreseeable market landscape will require a more centralized focus on risk, particularly when it comes to international investing with fears of a global economic slowdown. That’s where products from Natixis like the Natixis Seeyond International Minimum Volatility ETF (NYSEArca: MVIN) can aid investors.

MVIN focuses on developed markets and seeks 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 fear of missing out is pretty strong, but the fear of losing money is real,” said Piré. “That’s a fear that will force you to sell a position when you’re down 20 to 30 percent, and usually at the wrong time.”

Even with U.S. equities rebounding from last year’s fourth-quarter tumult–the Dow Jones Industrial Average is up 13.38 percent, the Nasdaq is up 20.51 percent and the S&P is up 15.70 percent–it still makes sense to buy into a product like MVIN, which can provide investors with the duality of realizing gains during a market upswing and protect investors in a downturn.

Having this protection built-in via an ETF wrapper prevents investors from having to hedge their positions with the addition of uncorrelated assets like bonds or precious metals. Speaking to the former, however, the stock sell-off in the fourth quarter of 2018 also affected the fixed-income space.

The lockstep between stocks and bonds as of late is not something typically seen within the capital markets as both are prone to marching to the beat of their own drum. As such, investors can’t always look to bonds as the default go-to safe haven when the equities market goes awry.

“We’ve shown that we can capture the upside just as well as an index and on the down side, we’re going to reduce the magnitude of that drawdown,” said Piré.

For a sideways market that Natixis is forecasting, MVIN makes for “a perfect strategy to complement the rest of your allocation strategy or to be your only equity exposure.”

MVIN gives investors:

  • Less volatile approach to diversify internationally
  • Long-term capital appreciation seeking less volatile international stocks
  • Actively managed ETF with the ability to adapt over time

Cost-Effective, Short Duration Bond Exposure

The end of 2018 also spurred a move to bonds as investors sought after safe-haven alternatives amid the volatility. One corner of the bond market that especially saw an influx of capital was short duration bonds.

As such, one ETF to consider is the Natixis Loomis Sayles Short Duration Income ETF (NYSEArca: LSST). With the risk-on appetite tempered by last year’s fourth quarter, LSST still gives investors income, but with the risk management component of lesser duration.

LSST gives investors:

  • Dynamic, active approach to sector allocation and security selection by a highly experienced portfolio management team supported by the depth and breadth of Loomis Sayles credit and securitized research.
  • Cost-conscious portfolio building block as part of a diversified portfolio.
  • Integrated risk awareness tools not present in a passive index-based product.
  • Short-duration credit may offer higher yield than Treasury bonds of similar duration, should investors be willing to assume greater credit risk and cede some liquidity

The central bank has veered off their rate-hiking bonanza in 2018 with no rate hikes expected for 2019, but the appetite for income can still be satiated in the short duration via LSST. The fund’s 0.38 percent expense ratio also makes it a bargain given its active management strategy.

“That’s a product that could very interesting in a late-cycle environment where the Federal Reserve has softened their approach and not look to raise rates as quickly,” said Piré.

“That’s a product that can very attractive as part of an advisor’s or investor’s allocation in the bond space,” added Piré.

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