Bank outlines six ETF pandemic survival strategies

It appears everything is for sale but report presents six ideas that are faring better than others

Bank outlines six ETF pandemic survival strategies

It’s a risk-off market right now as panicked investors attempt to avoid being pummelled by the biggest financial crash since the Great Recession in 2008-09.

Daniel Strauss, research analyst at National Bank, said that with the coronavirus pandemic fears gripping the market, it appears everything is for sale. However, he pointed out that some ETFs are faring better than others.

While warning that his selections are for informational purposes only and that deeper risks lie ahead, he believes there remains – for now at least – a survival-style toolkit for investors after the S&P/TSX plunged more than 30% since its February 20 peak.

He said: “Despite the recent downturn, a few bright spots exist: some strategies and asset classes have delivered positive returns in 2020, and others have outperformed the broad benchmarks by a wide margin.”

His report includes ETF strategies that have done well this year, so far. He added that, clearly, if the market rebounds sharply, these choices may not continue to outperform. “For investors who believe that low and declining equity valuations might present attractive investment opportunities, the ETF market provides a range of strategies, be they benchmark tracking or thematic.”

Strauss presents six ideas to survive this downturn.

1, Low Volatility ETFs

“Although they have declined like virtually all pure-equity investments, Low Volatility ETFs have outperformed their respective benchmarks by about 2% to 5% since the peak. This may not seem like much given the losses that many equity investors are staring down, but it is still ‘outperformance’, with the possible trade-off of slightly lagging equity benchmarks during bull markets as well.”

2, Alternative ETFs

“With updated and unified regulations for alternative mutual funds, the Canadian ETF landscape now offers a variety of alternative ETFs that employ long-short hedge-fund style strategies. Market Neutral ETFs typically consist of a long equity portfolio and a short equity portfolio of the same size. For example, QBTL longs a portfolio of low beta stocks and shorts a portfolio of high beta stocks, resulting in zero net exposure to equity, but displaying a negative correlation with the equity market. Equity-focused ETFs have typically more beta exposure than market-neutral ETFs because of their net long equity positions. Multi-strategy ETFs such as NALT typically use multiple asset classes including equities, bonds, commodities and currencies to achieve uncorrelated performance relative to the broad benchmark.”

3, Buffer ETFs

“Buffer ETFs use long-dated options to achieve a defined outcome between specific dates one year apart on the calendar. Across that one-year window, they protect against the first 10% loss, but they also cap the upside. Intra-period, the outcome will depend on the path taken by the reference index. First Trust currently offers three such ‘buffer’ ETFs in Canada referencing the price performance of the S&P 500, with three calendar schedules available: February, August and November.”

4, Gold Bullion ETFs

“Gold bullion ETFs offer investors exposure to the spot price of gold; these products hold bars of physical gold stored in vaults. As a safe-haven asset, gold performed well this year. They also tend to work well in a low-interest environment which was the case since 2019.”

5, Long-Term Government Bond ETFs

“Long-term government bond ETFs typically do well in equity bear markets. Year-to-date, the 10-year Canada yield fell 1% to 0.7%. In the United States, 10-year treasury yields also dropped by 1% to 0.9%. However, long-term bonds exhibit higher volatility than short-term bonds because they are very sensitive to even small shifts in prevailing interest rates.”

6, Currency: USD

“As a safe-haven asset, the greenback performed well in 2020. Exposure to the U.S. dollar might be a natural hedge for many Canadian investors who invest in the U.S. equity market because it has a ‘flight to safety’ quality when global assets are selling off. For a recent example, since the peak, S&P 500 unhedged ETFs outperformed hedged versions by about 3%.”