Look to Active ETFs in the Late Business Cycle
This article was originally published on ETFTrends.com.
As investors enter the late stages of the business cycle, some may look to actively managed ETF strategies that may be more flexible in adapting to the quickly changing markets.
"We are big believers in active management," Dave Lafferty, Chief Marketing Strategist for Natixis Investment Managers, said at the 2018 Morningstar Investment Conference. "I think the market environment is becoming a little more conducive to that at this point."
Lafferty highlighted a couple of factors that has helped support the active outlook. For example, he highlighted the rising dispersion, so there is more room for active managers to pick and choose their spots to generate alpha.
As the bull market conditions mature, the changing economic environment such as wage growth and rising inflation will also produce diverging corporate earnings, which some managers will have to pick out.
"Beta may be tapped out," Lafferty said. "We had a great run in long-only stocks and bonds."
Additionally, Lafferty argued that passive does not really manage risk actively since these passive indexing methodologies only follows general market trends, which may leave many exposed to greater risks, especially among traditional market cap-weighted index investments.
"The later and later we get in the cycle, we think there is a good argument for better risk control in a portfolio," Lafferty said.
Consequently, investors may turn to actively implemented quantitative strategies that try to provide better exposure to the changing market conditions. For example, Natixis Investment Managers provides actively managed Natixis Loomis Sayles Short Duration Income ETF (LSST) and the Natixis Seeyond International Minimum Volatility ETF (MVIN) that have adapted time-tested strategies into dynamic ETF strategies.
The more recently launched LSST is supported by Loomis Sayles’ global research platform, which combines top-down macroeconomic analysis with bottom-up security selection. The Loomis Sayles Short Duration Income ETF will try to achieve current income consistent with preservation of capital by investing in fixed-income securities such as bonds, notes and debentures, as well as other investments, with an average duration between one and three years.
When deciding which securities to buy and sell, Loomis Sayles will consider a number of factors related to the bond issue and the current bond market, including the stability and volatility of a country’s bond markets, the financial strength of the issuer, current interest rates, current valuations and Loomis Sayles’ expectations regarding general trends in interest rates. The active ETF managers will also consider how purchasing or selling a bond would impact the portfolio’s risk profile and potential return.
MVIN focuses on developed markets and try to generate long-term capital appreciation with less volatility than typically experienced by international equity markets – the minimum volatility approach helps diminish portfolio risk.
The international minimum volatility fund will utilize both quantitative and qualitative factors to identify securities with lower volatility and a reduce the ETF’s overall volatility relative to the developed international equity market. The fund managers will screen for volatility of each individual equity security and correlation of each individual equity security to all other equity securities i the investment universe of international developed stocks.
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