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Biggest risks to markets in 2021

Noah Hamman — AdvisorShares Investments Founder and CEO joins Yahoo Finance Live to discuss how rising rates could impact market volatility in 2021.

Video Transcript

AKIKO FUJITA: Rising bond yields continuing to rattle some investors. Let's bring in Noah Hamman, founder and CEO of AdvisorShares Investments, to break down some of these moves. Noah, I'm not sure if you had a chance to listen to Brian breaking down some of the concerns that have been coming along with the rising bond yields, the rate with which they've risen this week. How are you looking at the overall market dynamic in that context?

NOAH HAMMAN: Well, certainly, it will make equity investors nervous. We are definitely seeing that impact in the market today. I'm probably in the lower-for-longer camp relative to interest rates. I know they've been bouncing up here in the short term as of late.

But it feels like, you know, the senator who you just had on from Maryland, the home state where I'm in, talking about how much money we're going to be spending with stimulus and infrastructure, you know, keeping those rates down are going to be critical, I think, for the Fed. So it'll be a bit of a tug of war between the market and the Fed keeping those rates down. But I think for us, we see it lower-for-longer.

BRIAN CHEUNG: Noah, Brian Cheung here. Now the question is, there's been a weird dynamic in the market where bond yields going up has also come alongside the equities market going down. So it seems like that traditional risk-on dynamic is just not in play. So where are people going in this type of market? It seems like valuations have already been a concern. Is this the inflection point where people start to maybe see some sort of correction?

NOAH HAMMAN: It could be if it continues on, right. From what we get feedback from for investors, they're nervous in terms of market being at all-time highs, being in the middle of a global pandemic, you know, wanting to protect the gains that they have made in the market so far and seeing some of the-- the downward volatility that we've had this week. So I think you're going to see an adjustment in people's portfolio to look for more alternative strategies. These are the kind of things that people have not been so excited about over the last five, maybe even 10 years, because if done right, they're not giving you the upside returns of the equity market.

They're giving you something that's truly diversified, trying to hit singles, not hitting home runs, so things like hedged equity. There's a new ETF that launched about a month ago, the ticker symbol is SCNT, but what's unique about it is that it uses options to hedge its equity portfolio. So it stays fully invested, which is where people want to be, but it gives them a little bit, some amount of that downside protection. So I think you're going to see more tools like that in investors' portfolios as we see more volatility.

AKIKO FUJITA: Is that the thinking that you think for investors is maybe sort of the safer way to play the market right now in the face of a lot of uncertainty, the volatility we've seen, passive investing instead of going directly-- you know, sort of investing directly into these companies?

NOAH HAMMAN: Right. I think so. You know, it really just depends on, obviously, that person's and that investor's risk tolerance, and time horizon, and all of those things. But it's just getting into the mindset that you don't have to capture every percent upside of the gain of the market, but-- but taking that protection.

It's not free, right. It's a drag on the portfolio to have those options in any strategy to try to give you that insurance or protection, and so being willing to maybe give that up. If we're wrong and the market's up another 10% or 20%, to give yourself some peace of mind, I think that's the change you'll see, or even tactical managers, right, some managers that are moving from place to place, US, global, internationally.

There's several products out there that people can use in their portfolio, whether it's a DWAW, which is from Dorsey Wright, or QPX, which is from the ThinkBetter team, where they're going to move from category to category. And the challenge with that for some investors might be that it might go to cash, but it might be at the wrong time, might be at the right time. And so we always tell people when you're looking at your portfolio and building it out, you want to think about it almost like your fantasy football team. Have a bunch of different managers that look at the world very differently, and that starts to give you a level of diversification that's important for your portfolio.

BRIAN CHEUNG: All right, well, if it's about fantasy football, then I would not be very good at that job. But thank you so much. Noah Hamman, again, founder and CEO at AdvisorShares Investment, thanks for joining us today.