If you are taking phone VIX – the ‘fear index’ that aggregates the embedded volatilities within the U.S. options market – you’ll notice that it spiked utilizing a vengeance last August.
This move coincided with China devaluing the Yuan, a little. After that, the VIX has settled back, though not without first taking us with tumultuous January on record, and, now, the ECB’s all-out move to ensure a favorable market response to its latest stimulus measures.
Is there more turmoil ahead? And if so, what should investors do concerning this? While February provided a pace of respite in the markets, it’s impossible to preclude the potential for more volatility inside the months afterwards. When it comes to how to proceed, you will notice a number of answers, based on your very own situation, your starting position, and importantly, your viewpoint how things will have out – considering that ultimately everyone is just making an educated guess.
One interesting potential spot to explore are factor ETFs, which attempt to isolate only one factor – such as volatility, value, momentum, growth and yield. The next chart includes the Six month performance of various factor ETFs alongside the ones from their traditional S&P/TSX composite counterpart, the iShares Core S&P Capped Composite Index ETF (XIC).
As the outcome show, it had been a difficult period, even if things improved in February.
Considering the big quantity of empirical studies suggesting most managers don’t beat industry either consistently or more time, “buying the market” – in this case XIC – remains the best strategy.
Many though – from personal biases, or out of a concept that pure passive indexing is simply too easier to be true (will it be that simple?) – are increasingly choosing so-called “Smart Beta” strategies, often accessible in an ETF.
According for the latest FTSE Russell Smart Beta – 2015 Global Survey, 47 per cent of these evaluating “smart beta” ETFs expected to make an allocation over the following 1 . 5 years, while another 47 percent did not know, as well as the remaining 6per cent weren’t seeking to make an allocation.
From a satisfaction standpoint, notebook results reported that 61 per cent of owners were either satisfied or very satisfied, only 2 per cent dissatisfied, while 27 per cent reported it was either too soon to rate or did not know.
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What will investors do, meanwhile, when meaningful divergences within the respective smart beta solutions selected materialize? Would they abandon the process? Can they make an effort to move amongst factor solutions? Or can they, as already appears to be the problem, choose to diversify among more “smart” strategies?
With the most recent headline from the U.S. suggesting value as being a factor has underperformed for many of history 10 years, we’re reminded that factors could be around the wrong side of pure passive indexing for longer intervals.
Leaving aside size – which in Canada hasn’t produced coming back premium shortly, and quality, there is not yet an ETF, the table below presents ETFs providing contact with “volatility” strategies (prone to reduce volatility), value, momentum and growth.
As First Asset’s Canadian Value and Momentum ETFs marked their 4th anniversary earlier this year – having beaten industry over said Four years, it’s interesting to determine that both strategies know of rougher seas since last summer.
Going forward, the problem, given their well-documented longer-term possible ways to outperform, is if their current relative strength deficit presents an expedient entry way?
And otherwise, what from the other strategies? At all relative it is – with respect to the actual details and exposures within the underlying methodologies, performance dispersion means an opportunity to reassess which factor you need to stay with, or whether jumping ship may be worthwhile.
Remember though – timing factors might be as challenging as timing markets overall, whilst the discipline embedded in their screening methodologies should generally supply you with the discipline that you just keep to the factor or factors selected.
Yves Rebetez is md of ETFinsight.
