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 Clayton Fresk, CFA, portfolio management analyst at Georgia-based Stadion Money Management.
After experiencing a record-long bout of market complacency, this recent equity sell-off and significant climb in volatility caught many market participants off guard. Combine that with climbing interest rates, and these same market participants may be asking “Where can I hide?”
One answer that has been gaining traction is alternatives.
Alternatives is a very broad categorization that can have different uses within a broader portfolio. Some are intended to act as hedging mechanisms, while some are designed to provide a noncorrelated absolute return—there are numerous other functions as well, depending on the strategy.
That said, it seems alternatives usually get lumped in together as one large bucket of nonequity and nonfixed income.
ETFs Vs. Mutual Funds
While alternatives have been around in mutual fund form for a decent amount of time, the number of alternative ETFs has grown in the past few years. There are many ways one can compare the mutual fund to ETF universe to find that the similarities, differences and coverage overlap (or that there are holes) in one or the other.
Given that the equity market just experienced its first correction in a long time, using the S&P 500 Index as the measuring stick, it may be useful to look into how some of the different alternative mutual funds and ETFs performed during the sell-off.
For this analysis, consider ETFs and mutual funds in the following Morningstar categories:
- Long-Short Equity
- Managed Futures
- Market Neutral
- Tactical Allocation
(We’re excluding leveraged/inverse funds since these are generally more suited as trading tools rather than buy-and-hold investments. We’re also excluding volatility funds given the abnormal move in volatility (VIX) at the beginning of February, which skewed the analysis.)
First, look at the dispersion of returns between funds and ETFs across the aforementioned categories, using the recent peak-to-trough dates on the S&P 500 (1/26/18 – 2/8/18).
For a larger view, please click on the image above.
The ETFs and mutual funds experienced rather uniform performance dispersion. In other words, there was not a “clumping” of ETF performance either for better or worse. This should not come as a surprise given that mutual funds and ETFs want to provide a differentiated return stream, especially in the Alternatives space.