The top risks for investors in today’s volatile markets are emotion-driven behavior, corrections, and performance-chasing. Prime opportunities include solid portfolio construction framework, product innovation, and complimenting core positions, trends identified in a panel discussion as part of Charles Schwab’s ETF Week.
What to Watch Out For
In volatile times with big valuation swings, investors can let emotions get the best of them. These emotions can lead to sub-optimal behavior, said D.J. Tierney, Director, Client Portfolio Strategist, Charles Schwab Investment Management.
“The real contributing element to this is when they don’t understand what they own,” he said. “It’s one thing to buy an ETF and have it perform well, but if prices drop and you don’t understand the strategy, you may be more inclined to sell at an inopportune time.”
Market corrections can also be the enemy of investors and they aren’t to be unexpected in the near term.
“We’re not forecasting any recession, but we think at some point we will likely have one again,” said Sal Bruno, CIO, Index IQ & Managing Director, New York Life Investments. “In the meantime, you can have these shorter periods of corrections that can rattle investors and lead people to panicking and maybe selling at the wrong time.”
Over the next six months, another big risk for investors is performance-chasing.
“One of the things that frustrates me as an investor myself is when I make decisions based on performance alone and look at too short of a timeframe,” said Steve Deroian, Head of ETF Strategy, John Hancock Investments.
The best way to avoid this mistake, said Deroian, is for investors to understand what they own, do their due diligence, and to set right expectations.
Finding Opportunity Today
Continued volatility and lower yields is leaving many investors looking for alternative sources for yield. Schwab’s response, according to Tierney, is helping to create a portfolio construction framework.
“We heard from advisors that they need assistance in packaging ETFs into portfolios,” he said. “By sharing our framework, we’re helping them blend low cost funds with strategic beta as well as active as well. If you blend all three together you can potentially achieve higher risk adjusted returns in volatile times.”
Product innovation can also be the friend of investors during times of uncertainty. Innovation is taking place, in particular, with ESGs and active ETFs, notes Bruno.
“We are seeing a lot more from a product innovation standpoint in the ESG or socially responsible type of investing,” he said. “We are also seeing innovation with active ETFs. Given the SEC approval of the Precidian non transparent ETF methodology, you are going to bring active equities … to the fore.”
Deroian spots opportunity in complimenting core positions.
“A lot of advisors that we talk to are looking for ways to either compliment a core position they have in passive or maybe eliminate it all together and go to a factor based solution,” he said. “We see more individuals looking at the core positions that they hold and saying there may be a better way to get that outperformance we all crave but do it in a responsible way that blends different strategies together.”
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