In the late stages of a business economic cycle with a prolonged bull market, ETF investors should be prepared for increased uncertainties and quick swings ahead.
“I think advisors out to be thinking about late cycle realities,” said Todd Jablonski, Chief Investment Officer, Principal Portfolio Strategies, at Inside ETFs 2019. “We’ve come off a period of very low volatility for many years – really crescendoing in 2017 and 18. They were starting to see some of the volatility that investors should begin preparing for.”
Jablonski suggested that smart beta or factor-based strategies may be one way for investors to hedge risks. For example, the Principal U.S. Mega-Cap Multi-Factor Index ETF (NasdaqGM: USMC) is comprised of companies with the largest market capitalization taken from the Nasdaq U.S. 500 Large Cap Index and screened based on a quantitative model. USMC is a multi-factor fund, an increasingly popular strategy within the broader smart beta universe.
USMC’s underlying index utilizes a modified equal-dollar weighting methodology where securities in the top 10% of aggregate market capitalization are weighted by market-cap, but the remaining securities are equally weighted and volatility adjusted to give a higher tilt toward those that are more liquid and less volatile.
Bond investors may want to think about shifting away from the increased risks associated with traditional fixed-income index funds and look to active strategies that are better capable of adapting to the changing conditions.
Principle is known for its asset allocation at the core, and the money manager offers ETF versions of its core strategies. For instance, the Principal EDGE Active Income ETF (NYSEArca: YLD) is an actively managed multi-asset fund. Multi-asset exchange traded funds have provided diversified exposure to a group of various asset classes and generated attractive yields and have become income investor favorites as advisors and investors searched for new yield sources amid several years of rock-bottom U.S. interest rates.
YLD seeks to generate consistent income through changing market environments and over market cycles. It invests opportunistically across a diversified range of income-generating asset classes while managing for risk. EDGE’s proven investment process, long history of income investing, and strong risk management and credit research capabilities may help enhance returns while reducing risks.
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