Ben Lavine, chief investment officer, 3D Asset Management; Hartford, Connecticut
Investors may want to position for a flat, but volatile, market for 2017. The world will be adjusting to a new fiscal and monetary regime reflecting higher cyclical growth, but with it, prospects of higher inflation.
In this environment, there are two ETFs to consider:
Midstream pipeline distributors benefit from stable oil/gas prices and rising demand, and distributors have been able to realize more value out of their pipeline assets when they were spun off into master limited partnerships (MLPs).
MLPs have some tax advantages, and have attracted yield-hungry investors. But the MLP structure was under a lot of stress during sharp commodity price collapses when historical correlations to oil prices suddenly spiked. That happened as recently as the first quarter of 2016.
For that reason, rather than investing in MLP ETFs, investors may want to consider investing in the general partnerships (GPs) instead. MLPX is a passive, rules-driven ETF that primarily invests in midstream GPs while limiting its MLP investments to 25% of the fund—that’s a tax advantage.
GPs also offer more growth potential, rather than income, since they hold incentivized distribution rights that entitle the GP to a higher proportion of quarterly distributions. This helps the fund to be less sensitive to a rise in interest rates versus pure MLP funds. The midstream model should perform well in a flat, stable commodity-price environment.
Disclosure: At the time of writing, 3D Asset Management held a position in MLPX.
If 2017 ends up as a flat but volatile market, investors may want to consider low-volatility, absolute-return strategies. Unfortunately, there are not many cost-effective options to choose from.
With an 0.85% expense ratio, JPHF offers an attractive core option around which to build a retail alternatives-based strategy. J.P. Morgan employs a rules-based approach to build a diversified absolute-return portfolio targeting 4-6% absolute return, while keeping the stock market beta to approximately 0.3. (The fund is only two months old, so AUM is still very small, as is the live track record.)
JPHF focuses on three quantitatively driven themes: equity long/short; event-driven, such as merger arbitrage and share repurchases; and global macro, such as carry and momentum trades. This ETF maintains flexibility when it comes to allocating among the three strategies depending on expected returns.