There’s An ETF For That
By Roger Nusbaum, AdvisorShares ETF Strategist
Blackrock (iShares) had a wide-ranging blog post that included how to reposition in what it believes is a change in volatility regimes. The big idea is that last year’s extremely low volatility readings were of course going to end at some point and that the return to a higher volatility regime, whether that meant a “return to normal” or something else could have an undue influence on investors’ decision making.
An example of this could be over reacting to a small decline. Before February’s panic, many participants talked about 5-10% corrections being normal, that it was not uncommon to have one or even two of those per year. If that is true, then it probably doesn’t make a lot of sense for long term investors (as opposed to traders) to try to trade around something that is a normal, regular market occurrence. Still though, I think it is easy to envision some level of panic influencing long term investors to the point that they reacted by selling unnecessarily.
If volatility is back, it makes sense for investors to ask themselves whether they should attempt to manage or smooth out their portfolio’s volatility. To my way of thinking, this is clearly part of an active investment strategy, but I would remind readers that active strategies don’t have to be implemented using only active funds they can be implemented with index (passive) funds. I’ve made the argument many times there is almost no such thing as truly passive investors (rebalancing is an active decision).
After citing risk factors related to demographics and one or two other things Blackrock very succinctly says “to barbell exposures, earning solid risk-adjusted carry from both securitized assets and the front-end of the U.S. Treasury curve. We attempt to capture upside with equity options that are still the most convex risk asset expression, in spite of slightly elevated premiums. We still favor EM assets…”
While I have no opinion on whether anyone should follow their advice the strategy can of course be created with exchange traded products and can be done so quite narrowly. Pivoting to this week’s Barron’s, Mark Haefele from UBS believes that Germany and Japan are vulnerable to the tariff threats starting to unfold that for now are focused on steel and aluminum. The EAFE Index has almost 10% allocated to Germany and 24% to Japan.
Where it is the broadest funds that get the most attention and AUM an ex-Germany/Japan, foreign equity portfolio is easily constructed with factor funds, regional funds, single country funds, sector funds and even thematic funds.
Many years ago I made the obvious observation that ETFs would democratize portfolio strategy (here’s one link from nine years ago) and this is exactly what that looks like but it does take work to find these funds and then time to understand exactly what you’d be buying. Taking Haefele’s comment to an extreme, if Germany and Japan each cut in half on tariff issues they would be huge drags on funds tracking that index, so it might be useful to take the few extra steps to build a portfolio that avoids that threat or some other threat that might come along.
The information, statements, views, and opinions included in this publication are based on sources (both internal and external sources) considered to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. Such information, statements, views and opinions are expressed as of the date of publication, are subject to change without further notice and do not constitute a solicitation for the purchase or sale of any investment referenced in the publication.