In a maturing bull market environment, exchange traded fund investors should look to sectors and asset classes that are driving returns, along with smart ways to efficiently weight a portfolio toward the assets classes one believes will show the strongest intermediate-term potential.
On the recent webcast, ETF Strategies for a Late-Cycle Bull Market, David Mazza, Managing Director, Head of Product, Direxion; and Inkoo Kang, V.P. Product and Institutional Strategy, Direxion, touched upon the increased volatility and macro uncertainty, which has affected a large range of asset classes, along with new solutions for an aging bull market.
The markets exhibit cyclicality with one group outperforming another in most market environments due to their distinct macroeconomic relationships. many investors try to capitalize on the divergence by overweighting favored groups relative to others. However, most investors are long only constrained and unable to take full advantage of their view.
During a period of accelerating growth, the value, small cap and cyclical categories tend to outperform. On the other hand, during periods of decelerating growth, the growth, large cap and defensive categories are more favored.
Year-to-date, we have also witnessed the divergence in styles and categories, with investors favoring cyclicals over defensives, growth over value and U.S. over international, which have seen the greatest performance differences so far this year. Meanwhile, ETF investors have also taken the largest relative positions in the U.S. growth, small caps and emerging markets categories.
“Based on our framework, investors may wish to favor U.S. growth, U.S. large cap, cyclical sectors, the U.S. and developed markets,” Kang said.
In the U.S. markets, while credit spreads have declined, large-cap stocks have outperformed small company stocks. The U.S. yield curve continues to flatten, supporting the case for growth stocks over to value stocks. Additionally, cyclicals historically outperform in an environments of improving financial conditions while defensives tend to outperform when conditions are tighter.
Looking at international markets, commodities have been in a long term decline since peaking in 2008, which dragged on international stocks relative to the U.S. Over the last year, Commodities have fallen even further along with international markets.
Most investors take on long only position to capitalize on a market trend, but this strategy will not take full advantage of their view. Direxion argued that relaxing the long only constraint allows investors to gain greater overweight and underweight positions to better express their views.
To help investors better access the markets, Direxion has come out with a suite of ETFs to cover well-known investment pairs, and they are built using familiar passive building blocks, including:
- Direxion Russell 1000 Value Over Growth ETF (RWVG)
- Direxion Russell 1000 Growth Over Value ETF (RWGV)
- Direxion Russell Large Over Small Cap ETF (RWLS)
- Direxion Russell Small Over Large Cap ETF (RWSL)
- Direxion MSCI Cyclicals Over Defensives ETF (RWCD)
- Direxion MSCI Defensives Over Cyclicals ETF (RWDC)
- Direxion MSCI Emerging Over Developed Markets ETF (RWED)
- Direxion MSCI Developed Over Emerging Markets ETF (RWDE)
- Direxion FTSE Russell US Over International ETF (RWUI)
- Direxion FTSE Russell International Over US ETF (RWIU)
The underlying indices for each Relative Weight ETF is built with a 150% long component and 50% short component, resulting in a net exposure of 100% of assets. Each ETF and its benchmark index has an oppositely-weighted counterpart. The ETFs provide relative outperformance if the long component outperforms the short component. The strategy implements the long side of the trade, and then also rewards an investor when a macro view is correct.
Each ETF helps investors capture both sides of their expressed view, with a risk profile similar to the broad underlying asset class. The products are built on Direxion’s core expertise of delivering sophisticated and precise exposure, whether views are short, intermediate or long term.
“Our Relative Weight Strategies offer investors a core holding with increased exposure to potential outperforming positions relative to underperforming ones,” Mazza said.
Financial advisors who are interested in learning more about strategies for the late cycle can watch the webcast here on demand..