Complacency in the stock market is almost palpable as $300 billion has flowed into ETF coffers since the U.S. presidential election just seven months ago. With domestic and international indices hitting new all-time or 52-week highs, there continues to be a pervasive sense of calm in stock markets around the globe.
While many investors may be ignoring the risks of a pullback, there are some select ETF issuers who are thinking of the bigger picture and delivering tools to ride out future storms. Three fund companies have released diversified equity strategies this year with built-in hedges or risk management measures to reduce downside volatility. These risk-aware funds will provide active investors greater options to consider if capital preservation or minimizing volatility is a top priority.
The investment universe is littered with articles touting the advantages of various funds or strategies. I should know. I have written for the last five years about the characteristics of ETFs and closed-end funds that we consider for our clients. Some pass my rigorous test, while others are weeded out through careful analysis.
Throughout this time, I have realized it’s easy to compare two or three funds in a vertical category and dissect their merits. Some will stand out based on costs, while others may promote index methodology, tax efficiency, or security selection as their primary benefits. Read more
In this month’s video, I look at the technical trends developing in growth versus value stocks. Chart review includes analysis of large-cap, small cap, international, Treasury bonds, and high yield bond ETF prices. Observations of risk and reward are noted throughout, with an emphasis on trend following and sensible portfolio management. Recorded on May 31, 2017.
Small cap stocks are often thought of as the growth engines of strong market cycles. Investment in these companies engenders the notion of higher risk and magnified price fluctuations compared to their larger peers. As a result, these stocks tend to have streaky performance that can experience periods of strong relative gains or lagging returns.
The latter characteristic is what many would use to describe the current price action of exchange-traded funds that track small cap stocks. These passive index funds have meaningfully underperformed traditional large-cap benchmarks as price patterns meander in a sideways trend.
It’s easy to get sucked into the tunnel vision of an easy market. Trends are strong, liquidity is abundant, credit markets are cheerful, and volatility is low. This is when it becomes easy to get complacent. To trick yourself into believing the recent past will extend indefinitely into the future. It’s a mental trap that even the most tenured investors find themselves falling into over various cycles. Read more