The most recent attempt at a bear market rally of major indexes leading up to the release of the August CPI resulted in the S&P 500 clawing back almost 4% of losses over the course of four days before crashing on September 13 with a hotter-than-expected inflation report the catalyst for losses. It’s another brief relief rally in a string of bear market rallies during an extremely challenging year for equities, and with market uncertainty persisting, there will likely be more to come.
A bear market rally is generally a short-term rally (sometimes extremely short) by stocks in a broader environment of market decline. Trying to anticipate and invest around a bear market rally can often lead to greater losses as the larger downtrend pulls stocks lower and disenfranchised investors who had recently sought to capture gains instead face larger losses and withdraw from positions, driving prices down further.
Bear market rallies can look many different ways, whether it’s sharp, short rallies of anywhere between 5-10% or longer rallies over the course of months before the bear market trend kick in. There’s no actual definition for the parameters of a bear market rally, and the only certain way to identify a bear market rally is time and waiting to see if the rally capitulates to the bear market downtrend.
Image source: Nationwide’s Cycle Watch September 2022
The S&P 500 hit what is widely considered bear market territory in June when the major equity index logged losses greater than 20% for the year: between June 16 and August 16, the S&P gained about 14% in a bear market rally before falling once more.
The release of the August CPI, in which broad inflation increased 0.1% month-over-month despite falling gas prices, and core CPI gained 0.6% month-over-month, came in hotter than analyst expectations and resulted in a market route that led to the worst drop for stocks since June 2020. The S&P 500 closed down 4.3% as uncertainty drives volatility and fear in markets.
“Without any positive signs in the macroeconomic data, the risk/reward trade-off for equities will likely remain tenuous. Investors should avoid the “bull trap” by not trying to time the market,” wrote Mark Hackett, chief of investment research for Nationwide’s Investment Management Group, and Ben Ayers, senior economist with Nationwide Economics, in the September 2022 Cycle Watch.
Seeking Income Through Risk-Managed Equity Strategies
A strategy for advisors looking for investment opportunities within equities is the Nationwide S&P 500 Risk-Managed Income ETF (NSPI), which seeks current income with a measure of downside protection. Buying and holding onto a fund like NSPI throughout market volatility can take the guesswork and risk of trying to time uncertain markets rife with bear market rallies and sharp losses.
NSPI is an actively managed ETF that follows a rules-based options trading strategy that seeks to generate high current income every month and invests in stocks included in the S&P 500 Index. The S&P 500 Index consists of approximately 500 leading U.S.-listed companies representing about 80% of the U.S. equity market capitalization.
The fund also utilizes an options collar in seeking to generate monthly income; a collar strategy is a strategy that entails holding shares of underlying security while simultaneously buying protective put options as well as writing calls for the same security. A put option gives its owner the right but not the obligation to sell the underlying asset at a specific price on a particular day while a call option gives its owner the right but not the obligation to buy the asset instead.
The options collar is intended to reduce the fund’s volatility and provide a measure of downside protection.
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This article was prepared as part of Nationwide’s paid sponsorship of ETF Trends.
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KEY RISKS: The Nationwide Nasdaq-100® Risk-Managed Income ETF, Nationwide S&P 500® Risk-Managed Income ETF, Nationwide Dow Jones® Risk-Managed Income ETF, and Nationwide Russell 2000® Risk-Managed Income ETF (collectively, the “Risk-Managed Income ETFs”) are subject to the risks of investing in equity securities, including tracking stock (a class of common stock that “tracks” the performance of a unit or division within a larger company). A tracking stock’s value may decline even if the larger company’s stock increases in value. The Risk-Managed Income ETFs are subject to the risks of investing in foreign securities (currency fluctuations, political risks, differences in accounting, and limited availability of information, all of which are magnified in emerging markets).
The Risk-Managed Income ETFs may invest in more-aggressive investments such as derivatives (which create investment leverage and illiquidity and are highly volatile). The Risk-Managed Income ETFs employ a collared options strategy (using call and put options is speculative and can lead to losses because of adverse movements in the price or value of the reference asset). The success of the Risk-Managed Income ETFs’ investment strategy may depend on the effectiveness of the subadviser’s quantitative tools for screening securities and on data provided by third parties. The Risk-Managed Income ETFs expect to invest a portion of their assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index.
The Risk-Managed Income ETFs frequently may buy and sell portfolio securities and other assets to rebalance their exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Risk-Managed Income ETFs and greater tax liabilities for shareholders. The Risk-Managed Income ETFs may concentrate on specific sectors or industries, subjecting them to greater volatility than that of other ETFs. The Risk-Managed Income ETFs may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Funds’ value and total return. Although the Risk-Managed Income ETFs intend to invest in a variety of securities and instruments, the Risk-Managed Income ETFs will be considered non-diversified.
Additional risks include: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
The Fund expects to invest a portion of its assets to replicate the holdings of an index. Correlation between Fund performance and index performance may be affected by Fund expenses because the Fund may not be invested fully in the securities of the index or may hold securities not included in the index. The Fund frequently may buy and sell portfolio securities and other assets to rebalance its exposure to various market sectors. Higher portfolio turnover may result in higher levels of transaction costs paid by the Fund and greater tax liabilities for shareholders. The Fund may concentrate on specific sectors or industries, subjecting it to greater volatility than that of other ETFs. The Fund may hold large positions in a small number of securities, and an increase or decrease in the value of such securities may have a disproportionate impact on the Fund’s value and total return. Although the Fund intends to invest in a variety of securities and instruments, the Fund will be considered nondiversified. Additional Fund risk includes: Collared options strategy risk, correlation risk, derivatives risk, foreign investment risk, and industry concentration risk.
S&P 500® Index: An unmanaged, market capitalization-weighted index of 500 stocks of leading large-cap U.S. companies in leading industries; gives a broad look at the U.S. equities market and those companies’ stock price performance.
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