Many advisors are cheering on the stock market rebound but are becoming more concerned about the potential negative economic and corporate earnings impact of Covid-19.
In the upcoming webcast, Market Update: Investing in Both Tails, Meb Faber, Co-Founder and CIO, Cambria Investment Management, will discuss the current market environment and why a tail risk investment strategy might help hedge a portfolio against potential risks.
Specifically, the Cambria Tail Risk ETF (Cboe: TAIL) can help investors diversify a portfolio by mitigating any further downside risks.
“The name comes from the statistical distribution curve, where extreme events tend to occur on either ‘tail’ of the curve. In this case, tail risk is looking to protect investors from extreme market drawdowns, thus striving to maintain wealth that an investor has already gained,” according to Cambria.
Investors may want to consider alternatives strategies to better manage downside risks. Alternative investments, like TAIL, can be incorporated into a portfolio to provide diversification from equities or better protect an investor from drawdowns in stocks while allowing for some upside participation.
TAIL tries to provide income and capital appreciation from investments in the U.S. markets while protecting against downside risk, according to a prospectus sheet. The active ETF will invest in cash and U.S. government bonds, and utilizing a put option strategy to manage the risk of a significant negative movement in the value of domestic equities, or more commonly known as tail risk, over rolling one-month periods.
The TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high. While a portion of the fund’s assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate term US Treasuries.
A put option provides the buyer the right to sell the underlying index to the put seller at a specified price within a specified time period. In the event of a decline in the underlying index, the put may help reduce the downside risk. Consequently, the put option becomes more valuable as the underlying market weakens relative to the strike price.
Traders who write put options have essentially sold the right to another investor to sell shares at an agreed-upon price. On the other hand, the buyer has purchased the chance to sell stock to the put writer. In other words, the party who writes puts acts as an insurance provider for the portfolio’s downside but gains access to premiums, or income.
“No one knows when the next drawdown will hit, but there are ways to mitigate market risk. Having a tail risk strategy is one of them,” according to Cambria.
Financial advisors who are interested in learning more about the tail-risk investment strategy can register for the Thursday, July 23 webcast here.