An ETF Strategy to Generate Income, Mitigate Downside Risks

Exchange traded fund investors should consider strategies for managing risk, … to generate reliable streams of income from traditional bond investing.

Exchange traded fund investors should consider strategies for managing risk, while generating income from some of the most innovative companies in the market today.

In the recent webcast, Income Redefined: Positioning Your Portfolio for the “Known Unknowns”, Mark Hackett, Chief of Investment Research, Nationwide, pointed out that while the S&P 500 Index has generated substantial returns since the 2008 financial crisis, periods of heightened volatility, such as the Europe debt crisis, U.S. debt downgrade, Greece default concerns, and China foreign exchange devaluation and coronavirus pandemic have contributed to quick market turns.

Hackett also highlighted some challenges that investors continue to face. For example, there is still a high percentage of Americans with no retirement savings – 12% of Americans above the age of 60 don’t have a retirement account as of 2019. Many investors trade on emotions which hurt returns over the long run – the average asset allocation investor showed a 4.8% annualized return from 2009 through 2019, compared to the 9.6% return of a 60/40 stock/bond portfolio.

Meanwhile, Nationwide remains cautiously optimistic about the economic turn around after the Federal government did “whatever it takes” to support growth through initiatives like increased fiscal spending and aggressive monetary policies.

As a way to help investors capture the growth opportunities ahead, Efram Slen, Head of Research, Global Indexes, Nasdaq, highlighted the Nasdaq, which tracks industry disruptors and forward thinkers, with a particular focus on technology stocks that have evolved from creating consumer products to a group of companies upon which every industry and sector have become dependent. The underlying story for the rise in the Nasdaq-100 is that the U.S.’s economic growth is shifting from capital-intensive, traditional industries, like Basic Materials and Oil & Gas, to the “new-economy” sectors, such as Technology and Consumer Services. From day-to-day tasks to social interaction, each has an important influence on everyday life.

“The fundamental data behind the NASDAQ-100 has drastically improved over the past decade despite a volatile economy and the greatest financial market collapse since the Great Depression,” Slen said.

“Earnings, the most basic number to value a company, have skyrocketed, showing maturation of the companies as they increase revenues but reduce costs. Costs have been controlled, shares were bought back, dividends have increased and P/E has contracted,” he added.

Consequently, the shift in NDX fundamentals has resulted in significant outperformance over other US large cap indexes.

Jonathan Molchan, Managing Director and Portfolio Manager, Harvest Volatility Management, also highlighted the lingering challenges of generating income in a lower for longer yield environment. On September 16, 2020, the Fed pledged to keep rates at or near zero through 2023, reinforcing the current challenge faced by investors seeking to generate reliable streams of income from traditional bond investing.

Molchan also saw more investors brace for turbulence as the presidential race heats up. In a pickup that exceeds previous races for the White House, a volatility “kink” has emerged around October and November, as investors price in an uncertain election outcome and a potentially messy aftermath.

Meanwhile, conventional safe-haven assets have lost some of their luster this year. This September marked the worst performance of “safe haven” assets during a significant equity market drawdown in over a decade.

Alternatively, investors seeking to target current income with less risk relative to traditional income-focused investments have turned to the Nationwide Risk-Managed Income ETF (NYSEArca: NUSI). The Nationwide Risk-Managed Income ETF uses an options trading strategy called a protective net-credit collar to generate income. The options strategy sells an upside call option and uses a portion of the proceeds received to buy a put option to hedge downside risk on an underlying portfolio of securities.

“In the midst of recent market disruptions, NUSI has maintained a high, stable yield profile, while simultaneously outperforming other popular income-focused investment solutions, since its inception,” Molchan said.

“Year to date, the downside risk mitigation benefit derived from NUSI’s dynamic collar, specifically the Fund’s constant, fully financed hedge, has generally contributed to a lower level of volatility, relative to other income-oriented investments,” he added.

Specifically, NUSI showed a 0.23 beta as of the end of September 2020, compared to the 0.33 beta in emerging market debt, 0.39 beta of high-yield bonds, 0.46 beta of preferreds, 0.92 beta of high dividend stocks, 0.99 beta for REITs and 1.02 beta for MLPs. As market volatility spiked in the midst of the COVID-19 pandemic, NUSI became less correlated to the market, relative to other income-oriented investments, with a corresponding decline in the Fund’s beta.

“NUSI’s fully financed hedge effectively minimized the losses experienced by investors on the worst days of the ensuing COVID-19 fueled sell-off,” Molchan said.

Through the combination of income generation and downside protection, NUSI can benefit investors and advisors as it’s a solution that can complement a traditional 60/40 allocation, and it can be used as a bond alternative that can afford investors flexibility across varying market cycles. Also, NUSI can be a volatility dampener that may augment existing allocations as well as a tool that may aid in supplementing current income.

NUSI follows a three-step strategy. First, it fully replicates the constituents of the Nasdaq-100 Index. Secondly, the ETF deploys a rules-based options collar strategy that combines a covered call and a protective put. For the covered call component, a near-at-the-money to out-of-the-money Nasdaq-100 Index call option is sold, with the intent of generating options premium. For the protective put component, the strategy uses a portion of the options premium received to purchase an out-of-the-money Nasdaq-100 Index put option, which seeks to fully hedge the portfolio below the current market price and protect against potential losses in the equity portfolio.

Finally, a monthly distribution is paid out using a portion of the net-credit generated by the collar. If there is remaining options premium, the ETF will reinvest in the underlying stocks for potential upside participation.

Financial advisors who are interested in learning more about managing risk can watch the webcast here on demand.

BlackRock tops sales list for first three quarters of 2020

US fund manager BlackRock was the best-selling promoter in Europe overall for the first nine months of this year. With net sales of €68.3 billion, it came …

blackrockUS fund manager BlackRock was the best-selling promoter in Europe overall for the first nine months of this year.

With net sales of €68.3 billion, it came ahead of JPMorgan and Goldman Sachs, which both saw sales of €56.9 billion and €23.3 billion respectively, according to data from Refinitiv.

The European funds industry as a whole has seen net inflows to the tune of €297 billion in the first three quarters of 2020.

With over €211 billion of net inflows, money market funds were the best-selling individual asset type for the year to date, while equity global was the best-selling sector among long-term funds.

Detlef Glow, regional head of research at Refinitiv, highlighted that declining markets and net outflows witnessed in the first quarter were reversed by measures taken by central banks and governments, with economic relief packages and quantitative easing programmes.

“The measures taken led to a rebound of the equity markets accompanied by falling interest rates. The return to somewhat normal market circumstances led investors to buy back into mutual funds and ETFs,” he said.

Despite the net inflows to date, 2020 has been a “tough period” for asset management, he added.

© 2020 funds europe

Womenomics: Firms with female execs perform better, study finds

An analysis by Goldman Sachs found firms that have more women in senior positions as managers or on their boards outperform in their sectors [FILE: …

Companies with a higher presence of female executives have historically rewarded their equity investors with better performance, said Goldman Sachs Group Inc. strategists as they unveiled a basket of European firms that employ an elevated number of women.

“Over more or less any period since the global financial crisis, having more women in senior positions as managers or on the board is associated with company outperformance relative to the sector,” the strategists led by Sharon Bell wrote in a note on Tuesday. They added that this doesn’t apply to all industries and that academic research isn’t yet conclusive on this trend.

Goldman analysts rolled out a new basket of European companies with the most women at all levels, called Womenomics (GSSTWOMN Index), which includes firms such as LVMH Moet Hennessy Louis Vuitton SE, Swedbank AB, Nestle SA and AstraZeneca Plc. French and Nordic companies dominate the list, said the strategists, as France has a quota system for female board members while the Nordic region has historically had higher female labor participation.

Europe is beating the U.S. in its push to make women a more equal part of the workforce, and although the pay gap between men and women remains large in the region, it’s smaller in all major countries in Europe than in the U.S., Canada and in Japan, according to Goldman. Workforce participation rates among women in Europe have been rising, while in the U.S. they’ve been flat since the late 1990s, said the strategists.


The research weighs in on the market debate regarding the importance of investing based on environmental, social and governance principles. Europe has been seeing a boom in appetite for such investing this year, with about 50% of all new exchange-traded funds in Europe, the Middle East and Africa this year ESG-related and accumulating about $4.2 billion in assets, according to Citigroup Inc. data. That compares with $3.8 billion for new non-ESG funds.

ESG Flows

Inflows into ESG-focused strategies may have contributed to the better equity performance among companies with higher female presence, Goldman said.

“The price outperformance may be a function of flows into ESG funds targeting diversity metrics, rather than more women producing better outcomes or lower risks,” the strategists said. “But even if this were the case, we continue to believe investors will value higher social and governance scores for companies, so companies that do perform well on these metrics should continue to attract both flows and a premium.”

As a to-be-sure, Goldman strategists also added that they weren’t able to find a correlation between higher female presence and returns on equity. While the outperformance of companies with more women is “pretty robust” for different time periods, in industries like technology it doesn’t work, according to Goldman, as the sector has been slow to improve its diversity.

They also said that academic research hasn’t been conclusive on whether employing more women means better performance.

Goldman’s Europe Womenomics index is down about 7.8% this year, compared with a drop of 11% for the benchmark Stoxx Europe 600 gauge. Over the past five years, the difference is much more significant, with Womenomics up 22% compared with a gain of around 4.2% for the Stoxx 600.

Covid-19 Effect

The companies in the basket have on average 46% female employees, compared with 36% for the benchmark Stoxx Europe 600 Index. In addition the selected companies have 40% female managers and 42% women on the board.

Goldman doesn’t believe females in the workforce will be more adversely affected than men by the fallout from Covid-19. While women are more heavily represented in such industries as travel, media and retail, which have seen strong profit declines during this year’s crisis, more women are employed by the public sector, where salaries have held up better.

Longer-term social changes as a result of the pandemic could also benefit women, according to Goldman.

“There is likely to be less commuting, more online work and working from home, and this should enhance flexibility for both men and women,” the strategists said. “It is the flexibility of both women and men that we think has been a determinant in increasing women’s participation in the workforce in recent years.”

Here’s How Advisors Should Position Portfolios Now: BlackRock

BlackRock’s Aladdin platform forecasts annualized volatility of a traditional moderate 60/40 stocks/bonds portfolio above 9%, compared with 8.7% over …
Businesswoman pointing at stock chart on screen (Photo: Shutterstock)

Fewer bonds and more alternative investments and multi-asset products: That’s what BlackRock is recommending for advisors’ client portfolios at a time when volatility remains “stubbornly high” while the pandemic continues, fiscal pressures grow and a national election looms.

“The steady hand of advisors remains critical to ensuring clients maintain focus on their long-range investment plans,” according to BlackRock’s latest Advisor Insights Guide.

Following are its highlights of the guide, which is based not only on market developments but analysis of more than 20,000 advisors’ investment models from the firm’s Aladdin-powered Advisor Center and from advisors’ consultations with the firm’s Portfolio Solutions team. Interestingly, there’s no mention of environmental, social and governance or sustainable investments, which BlackRock’s CEO has been touting.

Reduce Bond Allocations

Bonds have historically served as the key diversifier for balanced portfolios, but extremely low interest rates coupled with rising equity risks have reduced their effectiveness. “Higher potential risk and lower anticipated returns is not an investor-friendly combination,” according to the Insights Guide.

BlackRock’s Aladdin platform forecasts annualized volatility of a traditional moderate 60/40 stocks/bonds portfolio above 9%, compared with 8.7% over the past five years, plus lower overall returns for both stocks and bonds.

“Bond allocations should probably decrease a bit compared to their levels in the past, when rates were higher,” the report notes.

Add Alternatives, but Beware Cost Creep

Such additions could help portfolios better balance risk and return for the future, according to BlackRock. It recommends that advisors sell both bonds and stocks to source investments in alternatives, changing the 60/40 traditional portfolio to 50/30/20 (stocks, bonds, alternatives), rather than to 60/20/20, with allocation for bonds equal to that for alternatives.

“Don’t simply sell out-of-favor bonds,” the report says. “Source the trade thoughtfully and measure the impact to ensure the right balance of risks.”

The BlackRock report doesn’t specify which alternative investments makes sense in the current environment, but co-author Patrick Nolan, a director and senior portfolio strategist, tells ThinkAdvisor that alternatives that offer consistent and predictable non-correlation to core stocks, ideally with lower volatility, are preferred.

Market neutral funds, for example, include products with no correlation to the S&P 500, according to Nolan. He cautions advisors, however, to do their due diligence for alternative investments because of the amount of dispersion between funds in that universe, which is much greater than that between core stock or core bond funds.

The BlackRock report also cautions about the relative higher cost of alternative investments — the average fee charged by an open-end alternative fund is 1.47% — which could affect portfolio performance.

The remedy for that, according to BlackRock: Use low-cost ETFs for core bond and stock allocations, though the stock sleeve could be split between core stock ETF and active strategies. “A shift in this area could meaningfully help offset the cost of adding alternatives,” the report notes.

“By shifting some portfolio assets from the lower expected returns of bonds to something higher in alternatives, we can potentially overcome a more challenging market environment for clients,” according to the report. “But we must manage risk and costs while we do it.”

Add Multi-Asset Products

“This year’s volatility may prove to be a boon to multi-asset managers who navigated the pandemic well” by protecting on the downside and participating in the upside rebound, according to BlackRock.

Until the end of 2019, such funds famously underperformed — 99% failed to beat the S&P 500 on a rolling three-year period ending in each of the last seven years — and advisors generally ignored them because of the strong returns and relatively low volatility of the S&P 500 over the past decade.

But now the ability of multi-asset funds’ to protect portfolios during declines and benefit them during recoveries “makes them quite valuable in a world of moderating returns and rising volatility,” according to BlackRock.

Comparing the performance of multi-asset funds between 2000 and 2020, using Morningstar data, BlackRock reports that they captured less than 30% of downside when the three-year average annualized return of global stocks was negative, but they captured two-thirds of the gains when the three-year annualized return of global stocks topped 7.5%.

The Current State of Advisors’ Client Portfolios

In addition to its recommendations for advisors’ client portfolios for the future, the BlackRock report also summarized how advisors’ portfolios have changed over the past year through June 30, based on data from over 16,000 portfolios.

Advisors overall have been increasing their use of ETFs, and their aggressive portfolios continue to hold more ETFs than mutual funds for at least the second year in a row: 49.2% versus 37.9%. In conservative to moderately aggressive portfolios, mutual funds hold the majority of assets.

Advisors have been increasing the duration of bond portfolios over the past year ended June 30, from 3.7 to 4.7, which was the biggest 12-month increase in the history of BlackRock’s analysis.

More advisor models now blend all three types than any other combination — index, alpha and factor — and the heaviest use of factor products is in the U.S. large cap space.

Their stock allocations are higher than a year ago, with the increase coming entirely via U.S. stocks. Non-U.S. stock allocations are flat to lower.

Among stock sectors, advisors’ portfolios continue to underweight technology — its largest underweight — but now overweight health care, which had been an underweighted sector.

Average portfolio model risks have increased by 2.2% — far more than benchmark risk, up 1.4% on average. “Importantly, the average model went from below-benchmark risk a year ago to above-benchmark risk today,” in large part because credit risk has doubled from a year ago, from roughly 30% to 60% of total bond risk, on average.

“This does not appear the result of advisors buying a lot more credit in their portfolios, but rather the byproduct of increased credit risk in the markets,” according to BlackRock.

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