3 Ways To Prep For The End Of Low Volatility

July 18, 2014

Notwithstanding the trouble brewing in Ukraine and Israel, investors need to be vigilant about an abrupt end to recent low volatility.

This article is part of a regular series of thought leadership pieces from some of the more influential ETF strategists in the money management industry. Today’s article features Wilfred Hahn, chairman and co-chief investment strategist of Toronto-based Hahn Investment Stewards.

 

It’s summer, and critical thinking is not easy. In fact, it’s never easy. Yet the languid summer days can lull one into complacency, even with the troubling turns of events in the Ukraine and Israel.

I’m referring to something far deeper in a macroeconomic sense than the breakout of hostilities in the world’s hot spots. I’m talking about preparing for the end of the unprecedented environment that has prevailed since stocks fell by almost 50 percent six years ago. Yes, financial markets have retraced all of that drawdown and then some, but investors should not be fooled into believing normality has returned.

We’d say that investors have three choices to prepare themselves for a major shift in the economy, including possibly having a position in a security such as the iPath S&P 500 VIX Short-Term Futures ETN (VXX | A-47). VXX, to be clear, is not an investment, but it could mitigate the harsh effects of any sharp sell-off.

But before we look more closely at VXX and other options we think are viable for investors, let’s take a cool dip into recently burgeoning developments. It will be timely.

Meandering In The Canyonlands

These musings came to me as I was exploring the Rockies from Colorado to British Columbia these past months. A compass has been a trusty aid, and our back-country wilderness travel has brought to mind a number of other illustrative parallels to current financial markets conditions.

First, let’s sight-in our compass. Everyone would agree that a reliable compass is a necessary aid when exploring wilderness areas. For example, hiking in the Canyonlands of southeast Utah or canoeing the northern Canadian Shield without one would be a death wish.

I remember being lost on one canoe trip. It was an experience of “angst” and “drang,” to say the least. The swamps and shorelines of northern Ontario can thoroughly deceive. Had we not had a working compass and accurate topographical maps, we might still be out there fighting swarms of black flies.

The problem in the macroeconomy is that navigational tools are at present all but useless.  The monetary and economic compasses one may have used to derive and support investment strategies in the past are no longer providing accurate readings. This also applies to old-time maps.

Without Compass

We would say that anyone having long experience in investment markets can pretty much write off the post-WW II patterns that prevailed before the year 2000. New factors are at play—at least for the foreseeable future.

We aren’t the only ones that hold this opinion.

 

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