Return of Volatility Emphasizes Need for Smart Beta Strategies

As U.S.-China trade deal negotiations remain in limbo, investors are seeing volatility return to the markets as evidenced by the Dow Jones Industrial Average shedding 2 percent on Monday and Tuesday combined. The latest market movements emphasize the need for smart beta strategies–an extension of the overarching theme for investors to get strategic in 2019.

“This recent pick-up in volatility was long overdue given the streak of extraordinarily low volatility we’ve had recently,” said Salil Mehta, a statistician and former leader a former director of analytics for the Treasury Department’s $700 billion TARP program.

However, investors don’t have to assume more risk in order to ferret out the most profitable opportunities. Smart beta strategies can help limit the downside in market drawdowns and capture gains when markets are in an upswing.

“For investing purposes, we make the assumption that the more risk we take, the more return we receive is true across everything that we do in investing,” said Alex Piré, Head of Client Portfolio Management, Natixis Seeyond. “Our studies and academic research have shown that’s not the case. If you’re allocating across risky assets, it’s not the same thing as if you’re allocating across stocks that potentially have very high correlations to each other.”

Given the latest volatility due to a breakdown in the U.S.-China trade deal, what exchange-traded products (ETPs) are there available in the marketplace that can address this concern for volatility risk while at the same time, realize any upward gains realized when markets rise? At the same time, what product can provide investors with the international exposure necessary for diversification?

One such product is the Natixis Seeyond International Minimum Volatility ETF (MVIN). MVIN focuses on developed markets and seeks to generate long-term capital appreciation with less volatility than typically experienced by international equity markets–the minimum volatility approach helps diminish portfolio risk.

MVIN gives investors:

  • Less volatile approach to diversify internationally
  • Long-term capital appreciation seeking less volatile international stocks
  • Actively managed ETF with the ability to adapt over time

Even with U.S. equities rebounding from last year’s fourth-quarter tumult, it still makes sense to buy into a product like MVIN, which can provide investors with the duality of realizing gains during a market upswing and protect investors in a downturn.

“What it enables you to do is invest in an asset class like international equities that can have significant up and down movements and extreme movements on both sides, but in a way that minimizes our own emotional reaction,” said Pire.

“We look to participate on the upside and cut that drawdown,” added Pire.

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