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ETFs to Help Grow Your Portfolio While Managing Risks Along the Way

Investors can take a look at tactical, risk-managed ETFs to reduce the negative effects of market swings and pursue capital appreciation for their investment portfolios.

In the recent webcast, Pursuing Systematic Alpha and Managing Risk, Tim Urbanowicz, head of research and investment strategy at Innovator ETFs; Sean Kommerstad, portfolio strategist for the Gradient Global Tactical Rotation Index, Two Rivers Capital Consulting LLC; and Michael Binger, president of Gradient Investments LLC, noted that during times of market uncertainty, investors can turn to alternative strategies to better ride out heightened volatility and turbulence while still maintaining some level of upside potential.

The strategists noted that investors continue to face various risk factors, such as rising Federal Reserve fund rates, a tightening monetary policy outlook, stubbornly high inflationary pressures, and a potentially weak economic outlook ahead.

Inflation seems to be the main cause of our current market malaise, and things won’t be turning around anytime soon. The strategists pointed out that inflation typically takes time to come down and a drop is unlikely until employment deteriorates. For example, during previous periods when inflation shot above 5% in developed economies since 1980, the Netherlands in 2001 was the quickest to see inflation fall 2% in around 3 years. On the other hand, Greece in 1980 took the longest to see a 2% drop in inflation at close to 30 years.

The elevated inflationary pressures and subsequent monetary policy tightening will likely contribute to increased recessionary risks. For the markets, with valuations and earnings per share growth still elevated, stocks could still see further weakness.

Specifically, the strategists noted that bear market rallies are not that uncommon. Since 1928, there were 337 average drawdown days during a bear market, with an average -23.0% decline over the bearish conditions. Meanwhile, bear market rallies of 5% to 10% occurred 70.0% of the time, and bear market rallies of over 10% occurred 29.9% of the time. These rallies on average generated a 9.2% return across 20.4 days.

In the fixed income markets, Treasury bonds could continue to come under pressure as the Fed maintains its quantitative tightening policy as it trims its Treasuries holdings, but key bond buyers are taking a step back in this challenging market environment.

As a way to help investors better adapt to the uncertain market conditions, Innovator ETFs is currently working on the Innovator Gradient Tactical Rotation Strategy ETF (NYSEArca: IGTR), an actively managed ETF that seeks to provide excess returns over the S&P Global BMI utilizing a rules-based investment process. Gradient Investments and Penserra Capital Management both serve as investment sub-advisors to the fund.

The Innovator Gradient Tactical Rotation Strategy ETF seeks to provide long-term capital appreciation to provide excess returns over the S&P Global Broad Market Index. The ETF tracks a tactical portfolio with an investable universe of global stock market sub-sectors. The Fund’s strategy seeks to identify the global market segment displaying the strongest price momentum metrics. The strategy utilizes Gradient’s rules-based, two-factor approach to create tactical investment opportunities.

Specifically, the actively managed asset selection takes advantage of market pricing anomalies. Holdings will exhibit movement from one asset to another based on a rules-based methodology. Furthermore, the strategy maintains a momentum methodology based on the belief that stock price trends are more likely to move in the same direction or rising prices likely to continue to rise.

“Equity markets around the globe often display wide dispersions of return over time. This creates the opportunity to make tactical investment decisions and rotate client funds to areas of strength around the globe,” according to Innovator ETFs. “43%: The average difference between the highest and lowest calendar-year returns across the nine sub-sectors and cash.”

Additionally, Innovator ETFs has recently come out with the Innovator Equity Managed Floor ETF (NYSE Arca: SFLR), which can help deliver U.S. equity upside and income potential while limiting a shareholder’s potential for maximum loss through a sophisticated options overlay. The active strategy is sub-advised by Parametric Portfolio Associates.

“With its potential to be used as a strategic, long-term, core equity solution, SFLR complements our existing line up of Defined Outcome ETFs by seeking to offer upside potential and downside mitigation in return ranges that extend beyond the parameters of our Buffer ETFs,” according to Innovator ETFs.

“Innovator’s Buffer ETFs were designed to provide investors a measure of certainty around their investment outcomes. SFLR builds on its foundation by seeking to participate in the market’s upside, while also limiting its exposure to the downside through the use of a portfolio of laddered puts.”

SFLR’s portfolio consists predominantly of S&P 500 Index stocks, with the sub-advisor implementing a representative sampling strategy to efficiently gain exposure to returns of the referenced index. As part of the equity sampling methodology, SFLR will seek to provide investment income, distributing dividends from the portfolio’s stock holdings back to fund shareholders.

Through a custom-developed, laddered options strategy, SFLR will target a maximum loss of roughly 10% on a rolling 12-month basis. The laddered options strategy employed by SFLR seeks to maximize upside potential. This should allow investors to participate in high-returning environments more fully for the fund’s large-cap domestic stock benchmark.

Financial advisors who are interested in learning more about the risk-managed investment strategy can watch the webcast here on demand.

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