The last three years have been loaded with unprecedented events up to and including right now. Massive stimulus packages, corporate bailouts and the most aggressive rate hiking cycle in history have changed the way that investors need to approach and analyze the markets. Michael Green, Portfolio Strategist with Simplify, is among those trying to interpret this environment. He joins the ETF Think Tank to talk about what he’s seeing and where he’s concerned.
Green is bullish on ETFs, in general, because of the ways they can bring complicated, institutional strategies to regular investors. A lot of things that are difficult within mutual funds, such as managed futures or credit strategies, become more accessible within an ETF. Plus, you can be far more tax efficient than you can within a hedge fund. They’ve been a great way to democratize investing.
One of the themes of the discussion was historical anomalies and how we’re seeing events play out that we haven’t before. One of the things that Green is seeing is what he calls active flows vs. passive flows. Broad flows into index funds are simply trying to participate and allocate according to market cap. He’s found that passive buying scales more with volatility than straight market cap allocation. Small-caps have been getting overlooked within this concept and that’s allowed the “magnificent 7” stocks to dominate recently. By passively investing, you’re skewing the flow of capital towards mega-caps because of cap-weighted investing.
Green believes that the MOVE index, the volatility measure for the bond market, has been rising again because people just don’t know what the heck is going to happen. Under more normal conditions, interest rates are absurdly high at the moment. The reality is that what we consider “normal” is often a function of how people look at the recent past. Various markets, including commercial real estate, are being reevaluated based on pandemic related factors and the presence of high interest rates. The bond market is one area where some behaviors are truly unprecedented, but Green suggests we might be near the end of the process.
Green finds covered call strategies to be particularly interesting. Through the sale of calls, you can effectively turn an equity into a fixed income asset. For instance, by writing calls on a stock like Apple, you’re essentially turning it into a high yield bond. You’re simply selling upside for yield and if you feel that downside risk isn’t substantial at the moment, covered call strategies can make a lot of sense.
Bankruptcies are where Green sees some of the biggest market dislocation. Heading into the financial crisis, spreads were widening, bankruptcies were climbing, but prices remained stagnant (i.e. the scene from The Big Short). Bankruptcies today are actually moving higher, surpassing the pace of the financial crisis. According to Green’s models, he believes high yield spreads should be around 800 basis points instead of the 380 level they’re at now. This is an area where things could correct quickly, but investors aren’t treating it as a major risk right now.
Other key takeaways:
- Who is the target market for Simplify ETFs? Some are suitable for a wide range of individuals, including fund managers, financial advisors, and retail investors. Others are perhaps better suited for RIAs and higher net worth investors, particularly those involving commodities and short volatility strategies.
- Green says he’s seeing a lot of unprecedented price behavior that he hasn’t seen in mega-caps before. If you look at NVIDIA’s post-earnings rally of 30%, there’s not enough short interest to cause that kind of move. What you had was small market moves that saw $7 billion in new money result in a $500 billion market cap increase.
- Green highlighted that real interest rates at the 30-year point on the curve have gone from -50bp to +210. All things being equal, equities should be down 65% with that kind of move. Equity risk premiums should be rising, but they’re not.
- Green suggests that COVID may have inadvertently helped hide the fact that the wheels were coming off in 2019. It took what was looking like a risk-off event and turned it into a violent risk-on event with stimulus and liquidity. Fiscal accommodation fundamentally flipped the script.
You can watch a replay of this virtual happy hour on our YouTube channel here. While there, subscribe to our channel to stay up to date on our latest content.
All investments involve risk, including possible loss of principal.
The material provided here is for informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.
All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.
Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.
The value of investments and the income from them can go down as well as up and investors may not get back the amounts originally invested, and can be affected by changes in interest rates, in exchange rates, general market conditions, political, social and economic developments and other variable factors. Investment involves risks including but not limited to, possible delays in payments and loss of income or capital. Neither Toroso nor any of its affiliates guarantees any rate of return or the return of capital invested. This commentary material is available for informational purposes only and nothing herein constitutes an offer to sell or a solicitation of an offer to buy any security and nothing herein should be construed as such. All investment strategies and investments involve risk of loss, including the possible loss of all amounts invested, and nothing herein should be construed as a guarantee of any specific outcome or profit. While we have gathered the information presented herein from sources that we believe to be reliable, we cannot guarantee the accuracy or completeness of the information presented and the information presented should not be relied upon as such. Any opinions expressed herein are our opinions and are current only as of the date of distribution, and are subject to change without notice. We disclaim any obligation to provide revised opinions in the event of changed circumstances.
The information in this material is confidential and proprietary and may not be used other than by the intended user. Neither Toroso or its affiliates or any of their officers or employees of Toroso accepts any liability whatsoever for any loss arising from any use of this material or its contents. This material may not be reproduced, distributed or published without prior written permission from Toroso. Distribution of this material may be restricted in certain jurisdictions. Any persons coming into possession of this material should seek advice for details of and observe such restrictions (if any).