Excessive Market Optimism Justifies the Need for Smart Beta Strategies

All three market indexes reaching record highs as of late is no doubt eliciting a sense of jubilation in the markets, but this excessive market optimism justifies the need for smart beta strategies when it comes to selecting ETFs.

Per a CNBC report, here’s a short list of some the good vibes emanating from the capital markets:

1) Barclays says small caps are at an inflection point and poised to outperform: “Headwinds have subsided,” they declare.

2) Bank of America also expects the cyclical rally will continue: “We think the stage is set for a restocking-driven recovery in Spring 2020 to extend the cyclical rally.”

3) Morgan Stanley also loves the rotation: “We think a secular rotation from Growth to Value is beginning.”

With so much elation in the markets, it might be difficult to dismiss the notion that downside protection is necessary given the serendipitous rise of equities as of late. However, ETFs with smart beta strategies like active management can help capture upside while still offer downside protection.

Getting Active in Bonds

A common strategy to mute the effects of a market downturn is to allocate capital to bonds. One way investors can get higher yields and get the protection of bonds via an actively managed bond fund is an ETF like the PIMCO Active Bond Exchange-Traded Fund (NYSEArca: BOND).

The fund is a diversified portfolio of high quality bonds that is actively managed, seeking current income and long-term capital appreciation, consistent with prudent investment management. BOND invests primarily in investment grade debt securities, and discloses all portfolio holdings on a daily basis.

The Fund will seek to maintain a fairly consistent level of dividend income, and generally seeks to manage capital gain distributions. However, there can be no assurance that a change in market conditions or other factors will not result in a significant change in the Fund’s distribution rate or that the rate will be sustainable in the future. With a primary benchmark of the Barclays U.S. Aggregate Index, the fund offers a core bond strategy that is designed to capitalize on opportunities across multiple sectors of the fixed income market.

“It’s a little bit more aggressive in some ways than the more basic version of the fund, but I would call it almost like a Pimco Income light, and Pimco Income, as you may or may not remember, is a much more aggressive version of Pimco offering in the sense of, it holds a lot of non-agency mortgages and things and it’s in our multi-sector category, which makes it quite a bit more aggressive than a regular core-plus fund,” said Morningstar senior analyst Eric Jacobson. “This one does qualify for core plus, but it’s got a little bit more freedom than a more basic fund and it’s interesting, and it’s had a good record so far. And the main thing is that we really like the managers and think that this is a very interesting offering.”

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