Investors who are worried about bumps in the markets ahead may look to an ETF that incorporates a dynamic investment strategy driven by institutional-level expertise from Ned Davis Research to enhance long-term investing and better manage downside risks.
“At a time when equity markets are working on a 10 year bull run, valuations are still relatively high, and headlines compel clients to call their advisors in worry, advisors may want a risk-managed approach to help clients feel more comfortable with their portfolios,” Edward Lopez, Head of ETF Product Management for VanEck, said on the recent webcast, A Survival Guide to Market Volatility.
The frequency of large market swings is on the rise with 20 plus or minus 2% return days in the S&P 500 in 2018 as market volatility triggered wide swings. Stephen Blumenthal, Executive Chairman and Chief Investment Officer at CMG Capital Management Group, also pointed out that even after the market weakness last year, U.S. stocks remain richly priced as the cyclically adjusted price-to-earnings ratio P/E10 or CAPE shows U.S. markets trading around the upper 95% percentile.
Nevertheless, there is a way to hedge against downside risks and still maintain upside potential to potentially enhance risk-adjusted returns over the long haul. Blumenthal mentioned that there have been new wealth opportunities 34% of the time historically, leaving the markets in a period of recovery at 43% of the time and periods of market declines at 23% of the time.
“A rules-based tactical equity allocation strategy may help manage risk and could potentially limit losses from downturns,” Blumenthal said.
Lopez highlighted the fact that there have been two occasions where the markets experienced a decline of 40% in the past two decades, which means that investors would have to ride the markets up 67% to fully recover. For example, after the financial crisis, it took four-and-a-half years before investors fully recovered from the pullback.
“Managing the risk of deep and extended periods of loss is critical for long-term success and peace of mind. Avoiding loss could help increase market participation by potentially reducing the amount needed to recoup,” Blumenthal said.
As a way to help investors better avoid downside risks, VanEck partnered up with CMG Capital Management Group and Ned Davis Research to come out with the VanEck Vectors NDR CMG Long/Flat Allocation ETF (NYSEArca: LFEQ). LFEQ can provide investors with an investment solution that offers a systematic approach to preserve capital by increasing cash when market health is weak while participating in uptrends with a full allocation to equity.
LFEQ is “engineered to offer a guided equity allocation for automatically trading into and out of the market. This seeks to avoid losses from major drawdowns typical of traditional buy-and-hold strategies,” Lopez said.
The strategy tactically allocates between S&P 500® equites and U.S. T-bills, seeks to minimize impact of market downturns and participate in uptrends and is driven by the institutional expertise of Ned Davis Research.
The strategy follows “a disciplined rules-based approach incorporating technical indicators helps remove emotion from investing,” Blumenthal said.
NDR produces a market breadth composite of S&P 500 industries to analyze each industry’s price level returns. The model would apply multiple technical indicators to each industry to measure trends, countertrends, and overall market health. Additionally, allocations are based on both the composite’s score of market bullishness or bearishness and its directional trend. The result is a strategy that limits the impact of the most severe drawdowns while still allowing investors to enjoy any market upside.
“Since 1995, the long/flat strategy improved the buy‐and‐hold experience with an average loss of just 16% versus 47% for traditional buy‐and‐hold. Recovery improved from 43 months to 13 months on average,” Blumenthal added.
Financial advisors who are interested in learning more about managing market volatility with ETF strategies can watch the webcast here on demand.