Displaying items by tag: volatility
A little under a month ago the VIX spiked dramatically due to bitcoin reverberations in tech markets and macro inflation trends, and it's trending…see the full story on our partner Positivly’s site
The market has been hard on special purpose acquisition companies (SPACs) as prices have fallen dramatically…see the full story on our partner Magnifi’s site
With the proliferation of ETFs and model portfolios and the growing amount of assets flowing into them, more and more AUM has been going into low vol and other risk management-oriented strategies. This is doubly true with the big volatility of the last year. However, a small cautionary tale to share today. If you take a look at LVHD, a popular “low volatility high dividend” ETF from Legg Mason, you see a fund that has significantly underperformed the S&P 500 and failed to protect investors from volatility. It is hard to know exactly why because the fund’s proprietary methodology is not transparent. However, even that fact is representative of the space. In their rush to defend against downside, many low vol ETFs and models can inadvertently and drastically underperform and expose investors to very low risk-return profiles.
FINSUM: What you get is not always what is being sold, so when choosing low vol products, make sure to pay significant attention to methodology and track record, especially during periods of volatility.
There has been a lot of speculation over the last month about whether the market is in a bubble. The reason for this are numerous: the huge run up in large cap growth stocks, the meme stock frenzy and beyond. However, the answer to whether the market is in a bubble can be found in a recent study and paper by Harvard. Researchers from the university outlined what bubbles really are, and clearly show that by historical standards there is only one sector of the market currently in a bubble: the S&P 500 Technology Hardware, Storage & Peripherals index, which does include Apple. However, no other sectors, nor the S&P 500 itself could be considered to be in a bubble. In fact, it is quite rare for the market as a whole to be in a bubble. Rather, market bubbles are usually constrained to a small handful of sectors. This could be seen in what is considered to be one of the biggest of all time—the Dotcom bubble. In the late 1990s and early 2000s, tech stocks surged to extraordinary valuations, while many sectors, like value stocks, lagged. When the bubble burst, many sectors actually benefitted (like value stocks).
FINSUM: This history is quite useful for context, but as our readers know, we feel each market cycle is unique and thus historical insight can only take you so far. In this instance, we think it is important to take into consideration that bonds are yielding very little, meaning there is no good alternative to equities. We believe this situation—which is obviously created/supported by the Fed and government—will help continue to lift equities.
Momentum funds often get bad press. While they have obvious utility, a lot of people say they feed bubbles and are subject to very big losses from market corrections. That said, some funds have started to do an excellent job at both hedging and outperforming to the upside. While that might sound impossible, it is not as hard as it sounds. The key is to follow the market’s movement, but not try to predict it. In other words, in strongly upward markets, you position yourself very bullish (e.g. 200% exposure). In downward markets, you take an inverse or short exposure to profit from losses. In a decent market you simply stay at 100% long exposure. By using this approach you can participate it more of the upside and lose less on the downside.
FINSUM: This is a smart strategy and one that some momentum funds are using to outperform the market right now. It can be employed either by buying funds or with an options strategy.