The past few months (not just May) have been an example of why watching the entire globe, not just the United States, is important. The convenient aspect to todays marketplace is that the ETF landscape makes this quite easy to do. The stock market is just one slice of a global, multi-asset pie – spanning treasury bonds, real estate, corporate bonds, commodities, developed international markets, emerging markets etc….
ETF’s offer an opportunity for investors to benefit from volatility in ways that institutions cannot. No large institution can rotate asset classes and global segments efficiently – it’s simply a matter of liquidity – they are too big relative to the trading volumes in the marketplace. Nimble hedge funds and advisors as well as individual investors have a very significant advantage in gaining and reducing ‘exposure’ to various asset classes.
As stated in our ‘ETF Overview’ page -- we believe investors should de-emphasize the micro issue of how to beat any particular market with stock-picking and instead focus their efforts on which MARKETS they would like exposure (long or short). These asset class decisions are what drives your portfolio returns and while you can certainly buy individual stocks or mutual funds or individual bonds --- it STILL should matter to you what is going on in the broader investment landscape.
Pure momentum strategies have been shown to work over the long-run – but with significant drawdowns. Our website is targeted at both finding relative strength AND building portfolios that limit drawdowns. We offer a portfolio management page where you can compare the volatility of your portfolio vs that of the main benchmarks. If your portfolio is more volatile than the global index then you should expect some very large drawdowns. If you take time to understand the important link between volatility and drawdowns then you will be much better off.
Backtest ETF Portfolio
Most investors were blindsided by focusing on the US economy and missed the larger issue of rising global volatility. When volatility rises, correlations between markets rise --- this is a strong statistical tendency. This is what happened to the U.S. stock market --- it would have been very odd if the global markets just continued to diverge amid rising volatility.
There will be a time to be more aggressive on global equities but there is no need to guess when – the relative strength models are sensitive to change and will show rising relative strength. As we highlighted in prior posts, equity volatility is rising and the relative strength of equities is falling vs other asset classes. This is not a change -- it is just a continuation of a process that began months ago and U.S. equities just finally joined in.
We have suggested keeping portfolio volatility down – by staying away from global equities – and this situation will continue for a while as the models are unlikely to just reverse sharply back up after a strong rotation out. If they do, we will have dry powder to join the big money forces that move assets classes into bull and bear phases.
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