Here Is What We Are About to Tell You in More Detail Below:
We currently sit with reduced traditional bond exposure and cheap equity exposure so we can own more stocks and more hedges. Owning more stocks should offer greater upside potential within our risk allocations, and more exposure to hedges should reduce drawdown. In summary, up or down, we feel better prepared than ever, and believe recent performance can speak to that and provide an illustration of what we mean.
The Update
What happens now? Our answer, and we are confident in the accuracy: We do not know, but we are prepared.
Whether the next move is up, or another trip back towards March lows, we wanted to address the reasoning behind our preparedness.
Recap
The market went down…a lot…from February 19 to March 23. Since March 23, the market has rebounded…a lot. The rebound, which has seen the S&P rise by roughly 30% as we type, has come in the face of some of the worst corporate and economic data that has ever been released.
Making sense of the market’s rebound during all of this will make your brain hurt. Rather than attempt to explain that – let’s focus forward. We allocate out of the windshield knowing that what has happened pales in comparison to what could happen. Within our yield + growth framework, it is our job to tilt portfolios towards areas of the market we think have the greatest potential to drive returns, while keeping a close watch of the risk associated with those potential returns.
Asset Allocation
Our allocation decisions are the most important decision we can make for portfolios. Broadly speaking, we have 3 options: Stocks, Bonds, Cash.
We will review each and then discuss our current positioning, so this note addresses relevant portfolio information and the title question: What happens now?
Cash
We believe cash is a poor long-term choice. It swaps near-term volatility risk for long-term longevity risk under the illusion of safety. Very rarely will you find us overallocated to cash, but our built-in hedging synthetically generates deployable cash during market sell-offs. This was a primary driver of our reduction in drawdown during the Feb-March sell off, and in our eyes a more efficient way to manage risk across a total portfolio.
Bonds
Bonds can generate returns for investors through the yield they pay, from interest rates dropping, or from reduced credit risk (a company’s ability to make good on their debt). Yields and interest rates are near all time lows with our economy in a Covid-19 induced recession. That is a bad combo that leads us to believe bonds will not be helping portfolio returns anytime soon. We have very little exposure to traditional bonds.
Stocks
Stocks have expected returns. We anticipate those returns to be driven by yield and growth and not valuation expansion. It is the uncertainty in valuations that cause us to think stocks, while having potential return, carry more risk than they have.
Our Portfolios – Up or Down
The Upside:
To be intentionally repetitive, we do not see upside in bonds as an asset class. We see the upside potential in stocks. Therefore, we own more stocks and less bonds. In fact, the majority of what would be bond exposure has gone to our Defined Risk Strategy, symbol DRSK.
We believe swapping traditional bonds for what DRSK brings to the table completely transforms portfolios, providing more exposure to the upside from stocks. Even with hedges holding back upside vs. pure stock exposure, we can ultimately improve potential compounded returns.
Think about a 60% stock, 40% bond portfolio – the rough equivalent of our moderate models when it comes to risk – and how this changes the math. 40% is an enormous portion of an account to devote to an asset class with little potential return. If we can rotate that 40% into exposure with upside as attractive as the strategy in our Defined Risk ETF has provided, we can position portfolios with more thought than the default way. There is no way to avoid the potential drag of bonds unless you simply avoid them. Bonds have less volatility than stocks, but less volatility than stocks is no excuse to own an asset class just to own it.
But what about the risk?
The Downside:
Lifting potential return in fixed income provides us the flexibility to be more defensive in our equity holdings.
In other words, we are confident that markets can give our style of fixed income exposure the opportunity to continue higher. This allows us to overweight stocks with more defensive positioning that could slightly trail a soaring stock market. The combination provides for strong upside capture but preparedness for the downside. Here’s what we mean:
Our baseline allocation to stocks is now more than half devoted towards our hedged equity strategies. These strategies are designed to provide exposure to quality companies with attractive growth prospects, all while defending against drawdown potential.
To summarize, we own more hedges in our portfolios today than we ever have. As the market has risen over the last month, we’ve made tactical shifts to reduce pure beta exposure in favor of equity exposure carrying explicit downside protection.
So, What Happens Now?
We wanted to send out a longer than typical note to emphasize the points above, to hopefully bring comfort and clarity to why we are excited about positioning at the moment. We expect to capture acceptable amounts of market upside, while being as prepared as ever for any downside if it comes our way.
We have designed our strategies and portfolios to specifically address the environment we are in. We are appreciative of your trust and allowing us the opportunity to continue to earn it. In a world full of uncertainty, we’re sure glad we have the portfolios we do. Please don’t hesitate to reach out with any questions at all.
Thank you,
The Aptus Team
251.517.7198
Disclosures
For Institutional Use Only
This commentary offers generalized research, not personalized investment advice. It is for informational purposes only and does not constitute a complete description of our investment services or performance. Nothing in this commentary should be interpreted to state or imply that past results are an indication of future investment returns. All investments involve risk and unless otherwise stated, are not guaranteed. Be sure to consult with an investment and tax professional before implementing any investment strategy.
Please carefully consider the funds objectives, risks, charges, and expenses before investing. The statutory or summary prospectus contains this and other important information about the investment company. For more information on DRSK, or a copy of the full or summary prospectus, visit www.aptusetfs.com, or call (251) 517-7198. Read carefully before investing.
Investing in the Aptus Defined Risk ETF involves risk. Principal loss is possible. The Fund is non-diversified, meaning they may concentrate their assets in fewer individual holdings than diversified funds. Therefore, the Funds are more exposed to individual stock volatility than diversified funds. The Funds may invest in options, the Funds risk losing all or part of the cash paid (premium) for purchasing put and call options. The Funds’ use of call and put options can lead to losses because of adverse movements in the price or value of the underlying security, which may be magnified by certain features of the options. The Funds’ use of options may reduce the ability to profit from increases in the value of the underlying securities. Derivatives, such as the options in which the Funds invest, can be volatile and involve various types and degrees of risks. Derivatives may entail investment exposures that are greater than their cost would suggest, meaning that a small investment in a derivative could have a substantial impact on the performance of the Funds. The Funds could experience a loss if its derivatives do not perform as anticipated, the derivatives are not correlated with the performance of their underlying security, or if the Funds are unable to purchase or liquidate a position because of an illiquid secondary market. The Funds may invest in other investment companies and ETFs which may result in higher and duplicative expenses. Investments in debt securities typically decrease in value when interest rates rise. This risk is usually greater for longer-term debt securities. Diversification does not assure a profit nor protect against loss in a declining market. One cannot invest directly in an index.
Investing in ETFs is subject to additional risks that do not apply to conventional mutual funds, including the risks that the market price of the shares may trade at a discount to its net asset value(“NAV), an active secondary market may not develop or be maintained, or trading may be halted by the exchange in which they trade, which may impact a fund’s ability to sell its shares. Shares of any ETF are bought and sold at Market Price (not NAV) and are not individually redeemed from the fund. Brokerage commissions will reduce returns. Market returns are based on the midpoint of the bid/ask spread at 4:00pm Eastern Time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Diversification is not a guarantee of performance, and may not protect against loss of investment principal.
Aptus Capital Advisors, LLC serves as the investment advisor to the Aptus Funds. Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. The Funds are distributed by Quasar Distributors LLC, which is not affiliated with Aptus Capital Advisors, LLC. The information provided is not intended for trading purposes, and should not be considered investment advice.
The Impact Series is a model portfolio solution developed by Aptus Capital Advisors, LLC. Aptus Capital Advisors, LLC is a Registered Investment Advisor (RIA) registered with the Securities and Exchange Commission and is headquartered in Fairhope, Alabama. Registration does not imply a certain level of skill or training. For more information about our firm, or to receive a copy of our disclosure Form ADV and Privacy Policy call (251) 517‐7198 or contact us here. Information presented on this site is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any securities or to advise on the use or suitability of The Impact Series, or any of the underlying securities in isolation. Information specific to the underlying securities making up the portfolios can be found in the Funds’ prospectuses. Please carefully read the prospectus before making an investment decision. ACA-20-.
