It’s hard to find any bright spots in markets right now. As U.S. stocks enter into a bear market at full velocity, oil continues to crater, and even the safe-haven-favorite gold turns red, “keep calm and stay the course” feels easier said than done.
In reality, when everything is driving off the cliff, there’s little to do other than to brace for a turbulent ride. But the ETF structure is there for you, even in times such as this. When we hail the democratization of market access that ETFs provide, we mean it. There’s an ETF for just about everything.
That means that even in this unforeseen event-driven sell-off that feels almost apocalyptic, there are a few ETFs designed to navigate just that. These funds chug along completely under the radar, because in bull markets, no one is looking for an alternative route.
The past few weeks, however, have offered prime opportunity for these funds to prove their value proposition. This is their moment, but like everything else, you have to know what you own.
Consider three ETFs as examples:
SWAN is much like a balanced portfolio. The fund allocates 90% to U.S. Treasuries and 10% to in-the-money call options on the SPDR S&P 500 ETF Trust (SPY). The way the math works with these derivatives is that Treasuries—the epitome of a defensive asset—drive most of the returns of the fund, about 65%. The S&P 500 options drive about 35% of the portfolio performance, according to Amplify.
The success of this mix in times of a market meltdown rests on the negative correlation between Treasuries and stocks. So far in this current market crash, that has held up, supporting the performance of this ETF, which sits practically unchanged year to date while the S&P 500 dips into bear territory.
Math Holding Up
What’s also interesting about this ETF is that, unlike some of its competitors, it doesn’t have a trigger to increase or decrease its allocation to Treasuries. SWAN doesn’t get more or less defensive—it simply is. It also doesn’t limit upside gains in the way some defined outcome strategies do, so in a year like 2019, when the market rallied more than 30%, SWAN held up nicely, tagging on gains of more than 20%.
This is a fund that will traditionally lag bull markets due to its defensive allocation, but not one that misses them entirely.
SWAN has $225 million in assets under management and costs 0.49% in expense ratio, or $49 per $10,000 invested.
BTAL is an alternatives ETF designed for absolute returns. By definition, this is an ETF that’s not meant to chase market returns on the upside, but to beat a steady drum of returns regardless of how crazy the music can get.
Is BTAL delivering? Yes.
This U.S. equity long/short strategy typically goes long low-beta stocks and short high-beta companies almost to parity—the portfolio is meant to be market neutral. According to FactSet, this methodology should ultimately mean this ETF has a slightly negative correlation to equities, which it does.
Negative Correlation To Equities
Currently, BTAL has a heavy allocation to cash, with about 50% of the portfolio invested in U.S. dollars. Top holdings, which include the likes of Watsco, Citrix Systems and American Water Works, each represent less than 0.3% of the overall mix. That portfolio and its negative correlation to stocks have BTAL delivering almost mirror opposite returns as the market melts down.
(Use our stock finder tool to find an ETF’s allocation to a certain stock.)
Anti-Beta Having Its Day In The Sun
BTAL, which has $177 million in total assets, is a pricey strategy due to its complexity. It comes with an expense ratio of 2.11%, or $211 per $10,000 invested.
JPED, as its fund name suggests, is a portfolio driven by events. It’s actively managed, so a portfolio manager is at the helm looking for opportunities to capitalize on corporate and other events.
You might think, based on nomenclature alone, that this is an ETF that would outperform markets. We are, after all, going through a massive catastrophic “event” in markets. But you’d be wrong. Year to date, event-driven has also been literally that for this fund’s performance—it’s going down.
JPED is a hedge-fundlike ETF, with current top holdings including the U.S. dollar, Hitachi Chemical and Wright Medical Group, among others. The fund is underperforming the S&P 500 as the market tanks.
Charts courtesy of StockCharts.com
Due Diligence Lesson
We highlight JPED here because it offers a lesson in due diligence. Even in times of panic investing, we need to take a moment and look beyond a fund’s name and cost to find what we are looking for.
This actively managed alternatives strategy invests in companies that the portfolio manager thinks will be impacted by events that are happening or are expected to happen. Because it’s actively managed, we don’t have full insight into what the manager is actually thinking.
But we do know, based on the prospectus, that JPED seeks low-correlated sources of return linked to corporate action or other events, as well as returns associated with investor behavior.
To that end, the manager has ample discretion on what tactics to use to play these events, such as merger arbitrage, shorting stocks, investing in derivatives and currencies, etc. JPED can mix long and short positions. But at the end of the day, in the past month, the fund has been mostly correlated to equities at about 0.66.
We are face to face with the end of the 11-year bull market in what some see as the most dramatic event in recent market history, but an “event-driven” ETF isn’t necessarily going to stay ahead of the curve if that’s not what it’s designed to do. Let’s state the obvious: There’s more to an ETF than its name.
If you’d like to see comprehensive lists of ETFs that offer novel access to the market at a time of uncharted action, check out other asset allocation ETFs as well as alternatives ETFs in our channels.
Contact Cinthia Murphy at [email protected]
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