Earlier this month, the United States capital markets witnessed exactly how vulnerable it can be to geopolitical risk with the markets roiled by the economic crisis in Turkey and how quickly it turned around with news breaking on renewed trade talks between the U.S. and China.
While this might spook the most risk-averse investors, Yasmin Dahya, Head of Americas Beta Specialists at JP Morgan Asset Management, reminded investors in her latest In The Know segment filmed at the NYSE that volatility can also serve as an ally in equities and adaptability can help in bond markets.
Smart Beta an Intelligent Choice
With the U.S. equities market full steam ahead along with trade concerns, particularly between the United States and China, it’s provided an ideal habitat for volatility. With that volatility comes a break from the tradition of market cap-weighted investments in which portfolios are constructed based on the market capitalization sizes of various stocks.
Supplanting that norm is an increase in smart beta strategies where alternative methodologies are utilized that follow rules-based practices for selecting equities when constructing a stock portfolio.
“One of the interesting changes that we’ve seen this year with the increase in volatility is an interest or a growing interest in smart beta or as we call it, strategic beta products,” said Dahya. “But essentially products that do something different than market-cap weighted and I think that trend is growing because of the more recent volatility.”
By employing a smart beta strategy, it can actually help investors mute volatility without being heavily exposed to certain stocks based on their market capitalization sizes, which can be prone to large swings during frenzied markets. This also serves as an effective diversification tool rather than heavy concentration to a specific sector.