Why Now Is the Time for Low Beta Investing | ETF Trends

Markets are risk-on, then they’re risk-off, then they’re risk-on again. It’s the continuing pattern this year as investors grapple with uncertainty on the strength of the economy, Fed interest rate hikes, and persistent, entrenched inflation. In a time of market volatility that is likely to extend into next year as the U.S. heads toward a recession, low beta strategies can be a smart play for advisors.

Beta is a measurement of volatility between a stock and the broader market, with the market having a beta of 1.0. A stock with a beta higher than 1 is more volatile than the market itself over time and therefore is seen as a higher-risk stock. It’s important to remember that volatility isn’t a bad thing inherently and that while high beta stocks are more volatile, they also have the potential for higher returns.

High beta strategies were popular in the strong, decade-long, risk-on bull run of pre-pandemic times but in a changing market regime when volatility is pronounced and persistent, advisors and investors have pivoted to volatility mitigation strategies for portfolios.

“With macroeconomic and fiscal policy uncertainty likely to persist into 2023, investors need to be mindful of downside risks. A lower beta strategy can help to keep them in the market while offering some upside potential,” said Todd Rosenbluth, head of research at VettaFi.

When Recession Threatens, Turn to Low Beta

Low beta stocks are those that have less volatility than the broad market, a strategy that has particular appeal this year in a challenging market environment for both bonds and equities. A low beta stock is seen as carrying less risk at the cost of lower returns and with the S&P 500, Nasdaq, and Dow Jones all hitting bear markets this year, lesser return potential has taken a backseat to volatility mitigation for many advisors.

“More than value versus growth, the factor that I prefer right now is beta, which represents risk and volatility,” Denise Chisholm, director of quantitative market strategy at Fidelity Investments, told Morningstar.

There is still uncertainty as to how high the Fed will take rates before easing off of hikes, much less how long they will hold rates in such restrictive territory before easing. Markets are currently placing a 50% probability that the Fed target rate will hit 5.00% at the February 2023 meeting according to the CME FedWatch Tool, but while uncertainty persists, so too will market volatility.

In the face of such a restrictive monetary policy alongside quantitative tightening that the Fed is engaged in, rolling off $95 billion a month from its balance sheets, recession in 2023 seems to be a foregone conclusion of not if but when. Low beta stocks and ETFs are particularly appealing in a recessionary environment for the defensive qualities they can bring to portfolios, namely volatility mitigation.

“In this recessionary environment, beta is the factor that matters most,” Raheel Siddiqui, senior research analyst and managing director at Neuberger Berman told Morningstar. “If you get beta right, you can get a lot else wrong.”

There are different ways to achieve low beta investing, whether through investing in individual companies that currently have low beta, investing in ETFs that track low beta companies (these funds are often labeled as low volatility) or investing in ETFs that use some other means to achieve lower beta, such as options.

Nationwide offers a suite of ETFs that are risk-managed funds within the major equity indexes for advisors. The funds are actively managed and seek high monthly income and volatility mitigation and include the Nationwide Nasdaq-100 Risk-Managed Income ETF (NUSI), the Nationwide S&P 500 Risk-Managed Income ETF (NSPI), the Nationwide Dow Jones Risk-Managed Income ETF (NDJI), and the Nationwide Russell 2000 Risk-Managed Income ETF (NTKI).

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