Tag Archives: volatility

Using Collectibles as a Hedge against traditional Market Volatility

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Image by Unsplash: Mick Haupt

By Devin Partida

Special to Financial Independence Hub

Today’s markets are difficult to navigate.

Keeping up with traditional market volatility can be difficult due to constantly changing market indexes and financial trends.

So, how do you stay afloat? To diversify your portfolio with assets that won’t move with the market, invest in collectibles.

What is Considered a Collectable?

Has anything been handed down to you as a generational gift? How about a piece of memorabilia from your favorite band or sports team? If these items are considered valuable due to rarity, historical significance or simple worth, they are considered collectibles.

Collectibles come in all shapes and sizes. From the smallest coins to the biggest cars, they might make valuable investments. Here are typical examples:

Art

One of the most common collectibles, art comes in many different forms. If you have a painting, sculpture or other piece that you think is valuable, you can research your art through museums or online collections.

Coins

Coin collecting is a centuries-old hobby. Coins are small and easy to access, making them an excellent place for beginners to start. Though tiny, they can be highly valuable. The 1943 Lincoln Head Copper Penny was once just a penny but now sells for over $204,000.

Sports Memorabilia

With new stars emerging every year, sports memorabilia will never go out of style. The market for sports collectibles is increasing in value for current sports stars like LeBron James and Steph Curry, alongside Hall of Famers and older sports legends.

Benefits of Investing in Collectibles

Investing in collectibles can bring various benefits — to your wallet and future. Here are four positive impacts:

1. Retain Value during Market Downturns

Volatility occurs when the market experiences dramatic price changes. When stocks change and prices shift, collectibles retain value because they are not solely based on the economy. Collectibles often maintain historical resilience, meaning their historic worth protects them during downturns.

2. Generate Return on Investment (ROI)

Collectibles can yield a great ROI. If you know the value of your collectibles, budget appropriately and care for your items, they could be worth a lot. Most collectibles appreciate around 10% each year, contributing to your financial security.

3. Enjoy a New Hobby

Although collectibles can be used as a financial strategy, they also make a fun hobby. What is something that interests you? Everyone has something that fascinates them, and almost anything can be collected. With collectibles, making smart financial investments can be more exciting.

4. Diversify your Portfolio

Investing in multiple assets is a smart way to protect yourself — and your money. Diversification mitigates unsystematic risks that could occur when the market shifts. Using collectibles along with traditional investments gives you more protection against volatility.

How to make successful Collectible Investments

Collectibles provide many financial benefits, but they also come with risks. Before starting your collection, understand the necessary steps to take and things to watch out for.

Make informed purchases

Do your research first if you want to start a collection or purchase a single item. When investing in online stock, people use investing apps to help them make smart decisions and avoid fraud. In-person investments require the same safety measures. Sellers could trick you into spending money on counterfeit items, so be smart when investing.

Understand Liquidity

Liquidity refers to how quickly an investment can be sold or turned into cash without impacting its price. Although collectibles gain value over time, they are meant to be long-term assets. Unlike stocks and bonds, which can be converted to cash in 1-2 days, collectibles may take years. This doesn’t mean you shouldn’t invest in collectibles — it just means you must be aware of timelines.

Integrate Collectibles into a broader Investment Strategy

Collectibles are a great way to diversify your portfolio as an additional form of investment. You should never rely on one asset, so don’t entirely count on your collectible to secure you financially. Practice safe investing habits by creating a plan and budgeting accordingly. Continue Reading…

Three ways to lower Risk in your portfolio with ETFs

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Here are some of the ways ETFs can be used strategically to help you sleep better at night.

Image courtesy BMO ETFs/Getty Images

By Erin Allen, VP, Online Distribution, BMO ETFs

(Sponsor Blog)

Volatility is often seen as the price of admission for achieving investment returns, but too much of it can feel like paying a hefty fee for a ride on an intense roller coaster, only to find yourself feeling queasy by the end and unable to enjoy the rest of the amusement park.

If the recent stock market turbulence in early August has left you contemplating panic selling, take a moment to breathe. Market corrections are a normal and healthy aspect of investing, and your portfolio doesn’t have to experience such dramatic ups and downs.

Why? Well, various defensively oriented ETFs can offer strategic ways to manage and mitigate risk, helping you stay the course and remain invested through the market’s inevitable fluctuations. Here are some ideas featuring BMO ‘s ETFs lineup:

Low-volatility ETFs

Imagine the broad market, such as the S&P 500 index, as a vast sea where the waves represent market volatility, and your investment portfolio is your boat navigating these waters.

How your boat responds to these waves is dictated by its beta, a measure that indicates both the direction and magnitude of your portfolio’s fluctuations relative to the market.

To put it simply, if the market’s “waves” have a beta of 1, and your portfolio also has a beta of 1, this means your portfolio will typically move in sync with the market, rising and falling to the same degree.

Now, consider if your boat were lighter and more susceptible to the waves, symbolized by a beta of two. In this scenario, your portfolio would be expected to swing twice as much as the market: more pronounced highs and lows.

Conversely, imagine your boat is a sturdy cargo ship with a beta of 0.5. In this case, your portfolio would react more calmly to market waves, experiencing only half the ups and downs of the market. This stability is what low-beta stocks can offer, and they can be conveniently accessed through various ETFs.

One such example is the BMO Low Volatility Canadian Equity ETF (ZLB)1, which selects Canadian stocks for their low beta. Compared to the broad Canadian market, ZLB is overweight in defensive sectors like consumer staples and utilities, which are less sensitive to economic cycles.

Holding allocations are as of August 19, 2024; sourced here1.

This ETF not only offers reduced volatility and smaller peak-to-trough losses compared to the BMO S&P/TSX Composite ETF (ZCN)2 but has also managed to outperform it — demonstrating that it is very much possible to achieve more return for less risk2.

To diversify further, you can also consider low-volatility ETFs from other geographic regions. These include three; BMO Low Volatility International Equity ETF (ZLD)3, BMO Low Volatility Emerging Markets Equity ETF (ZLE)4, and the BMO Low Volatility US Equity ETF (ZLU)5.

Ultra-short-term bond ETFs

While ETFs like the ZLB1 are engineered for reduced volatility through low-beta stock selection, it’s important to remember that they still hold equities.

In extreme market downturns, such as the one experienced in March 2020 during the onset of COVID-19, these funds can still be susceptible to market risk. This is pervasive and unavoidable if you’re invested in stocks; it affects virtually all equities regardless of individual company performances.

To fortify a portfolio against such downturns, diversification into other asset classes, particularly bonds, is crucial. However, not just any bonds will do — specific types, like those held by the BMO Ultra Short-Term Bond ETF (ZST)6, are particularly beneficial in these scenarios.

ZST, which pays monthly distributions, primarily selects investment-grade corporate bonds6. The focus on high credit quality, predominantly A and BBB rated bonds, is critical for reducing risk as these ratings indicate a lower likelihood of default and thus, offer greater safety during economic uncertainties.

Moreover, ZST targets bonds with less than a year until maturity6. This short duration is pivotal for those looking to minimize interest rate risk. Short-term bonds are less sensitive to changes in interest rates compared to long-term bonds, which can experience significant price drops when rates rise.

Charts as of July 31st, 2024 6

This strategic combination of high credit quality and short maturity durations7 is why, as demonstrated in the chart below, ZST has been able to steadily appreciate in value without experiencing the same level of volatility as broader aggregate bond ETFs like the BMO Aggregate Bond ETF (ZAG)8.

Buffer ETFs

If you recall the days of using training wheels when learning to ride a bike, you’ll appreciate the concept of buffer ETFs. Just as training wheels keep you from tipping over while also limiting how fast and freely you can ride, buffer ETFs aim to moderate the range of investment outcomes — both up and down.

Buffer ETFs may sound complex, but the principle behind them is straightforward. These ETFs utilize options to limit your downside risk while also capping your potential upside returns.

For example, a buffer ETF might offer to limit your exposure to a maximum 10% price return of a reference asset (like the S&P 500 index) over a year while absorbing the first -15% of any losses during the same period.

If the reference asset rises, your investment increases alongside it, up to a 10% cap. However, if the reference asset declines, the ETF absorbs the first 15% of any loss. Only after this “downside buffer” is exhausted would you start to experience losses.

BMO offers four such buffer ETFs, each named according to the start month of their outcome period when the initial upside cap and buffer limits are set. These include: Continue Reading…

Private Equity: A Portfolio Perspective

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So don’t ask me no questions
And I won’t tell you no lies
So don’t ask me about my business
And I won’t tell you goodbye

  • Lynyrd Skynyrd
Image courtesy Outcome/Shutterstock

By Noah Solomon

Special to Financial Independence Hub

I know virtually nothing about investing in private companies. However, I do know a thing or two about the theoretical and practical aspects of asset allocation and portfolio construction. In this vein, I will discuss the value of private equity (PE) investments within a portfolio context. Importantly, I will explain why PE investments may contribute less to one’s portfolio than is widely perceived.

Before I get into it, I am compelled to state one important caveat. Generalized statements about PE are less meaningful than is the case with public equities. The dispersion of returns across public equity funds is far lower than across PE managers. Whereas most long stock funds fall within +/- 5% of the average over a several year period, there is a far wider dispersion among underperformers and outperformers in the PE space. As such, it is important to note that the following analysis does not apply to any specific PE investment but rather to PE as an asset class in general.

The Perfect Asset Class?

PE allocations are broadly perceived as offering higher returns than their publicly traded counterparts. In addition, they are regarded as having lower volatility than and lower correlation to stocks. Given these perceived attributes, PE investments can be regarded as the “magic sauce” for increasing portfolio returns while lowering portfolio volatility. In combination, these attributes can significantly enhance portfolios’ risk-adjusted returns. However, the assumptions underlying these features are highly questionable.

Saturation, Lower Returns, & Echoes of Charlie Munger

It is reasonable to expect that average returns within the PE industry will be lower than in decades past. The number of active PE firms has increased more than fivefold, from just under two thousand in 2000 to over 9000 today. This impressive increase pales in comparison to growth in assets under management, which went from roughly $600 billion in 2000 to $7.6 trillion as of the end of 2022. It seems unlikely if not impossible that the number of attractive investment opportunities can keep pace with the dramatic increase in the amount of money chasing them.

Another reason to suspect that PE managers’ returns will be lower going forward is that their incentives and objectives have changed. The smaller PE industry of yesteryear was incentivized to deliver strong returns to maximize performance fees.  In contrast, today’s behemoth managers are motivated to maximize assets under management and management fees. The name of the game is to raise as much money as possible, invest it as quickly as possible, and begin raising money for the next fund. The objective is no longer to produce the best returns, but rather to deliver acceptable returns on the largest asset base possible. As the great Charlie Munger stated, “Show me the incentive and I’ll show you the outcome.”

There are no Bear Markets in Private Equity!

It is also likely that PE investments on average have both higher volatility and greater correlation to stocks than may appear. The values of public equities are determined by exchange-quoted prices every single day. In contrast, private assets are not marked to market daily. Not only do PE managers value their holdings infrequently, but they also must employ a significant degree of subjectivity in determining the value of their holdings. Importantly, there is an inherent bias for not adjusting private valuations when public equities suffer losses. Continue Reading…

A volatility play for the US bank sector

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Portfolio Manager explains why US banks have struggled, where opportunities might appear, and how investors can benefit from short-term volatility.

Image from Pixabay: Wendy Soon

By James Learmonth, Senior Portfolio Manager, Harvest ETFs

(Sponsor Content)

The US banking sector is facing uncertainty. In the wake of the collapse of Silicon Valley Bank in March of 2023 — and deposit liquidity issues at other regional banks — the whole US banking sector has suffered some significant stock market setbacks.

In those setbacks, however, investors may see opportunities, especially when we consider the scale and importance of the US banking sector. Of the 30 banks included in the global list of systemically important financial institutions, colloquially referred to as “too big to fail,” eight are based in the United States.

With those titans as ballast, investors may be able to find growth opportunities in US banking, if they understand why the sector is struggling now, where the upside could come from, and find a strategy suited to short-term volatility.

For someone seeking to take advantage of the dislocation we’ve seen in the US banking sector, a diversified approach is absolutely something you may want to look at. Adding a covered call strategy would give the opportunity to monetize the high volatility we’re seeing on the market now. It’s hard to say when the upside might come in US banks given all this uncertainty. But, there’s an argument to be made for someone who wants exposure to these US banks that a covered call strategy could make sense.

Struggles and risks in US banking today

The US banks’ stock market setbacks are due in part to a fear reaction from bank-specific failings at institutions like Silicon Valley Bank, but also reflect some structural headwinds for the sector.

The systemic issue comes down to deposit costs. As market-based interest rates rose sharply in 2022 and into 2023, the rates offered by banks to their depositors remained relatively low. Depositors, especially larger businesses, have begun to demand higher interest rates on their accounts, raising the cost of funding for many banks. Some of those depositors started transitioning some capital into other interest-bearing vehicles, such as money market mutual funds, which offered a higher interest rate as well. The whole banking sector is now facing some challenges to profitability growth due to the rising costs of deposits.

Those deposit costs can be more accurately described as a structural headwind, rather than an existential risk. While deposit costs contributed to the fall of Silicon Valley Bank, it’s notable that a range of company-specific factors played a role: Silicon Valley Bank’s high proportion of business clients, meaning its depositor base was concentrated and held high average account balances. When word spread across social media of venture capitalists sounding alarm bells to their investment companies, withdrawals cascaded. Continue Reading…

In volatile times, look for Quality

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By Paul MacDonald, CIO, Harvest ETFs

(Sponsor Content)

After nearly two years of a global pandemic, capped by surging inflation, the past month has been dominated by Russia’s invasion of Ukraine and a wave of geopolitical uncertainty unleashed by the largest European conflict since 1945.

“What a crazy decade these past two years have been,” is a line making the rounds on social media at the moment.

In the midst of all this volatility, uncertainty, and tension, we believe it’s important to focus on quality investments. We should begin by understanding and defining quality within our unique philosophy at Harvest ETFs. We can then outline some of the strategies at work in our Harvest ETFs that protect against volatile times and how today’s shocks fit in a longer-term macro-outlook.

Be diversified and own quality

To begin, our view remains that you want to be diversified and you want to own quality. How do you measure quality though? At Harvest, we do it through financial metrics like variability of earnings, visibility into earnings, return on invested capital and others. What those metrics tell us is that large-cap companies have the ability to navigate tail risks.

While risks related to geopolitical tension are top of mind now, we should emphasize that supply chain issues, inflation, and interest rate transitions are arguably the biggest volatility risks now. In this uncertain environment, it’s important to prepare for volatility from a wide range of sources. The expectations for how much and how quickly interest rates will rise is also going to be volatile and will likely result in some sectors doing better at different times, more so than what we have seen in recent history. Volatility shouldn’t come as a surprise if we’re adequately prepared for it with an investment approach that focuses on quality & diversity.

Our focus on quality is a core element of the Harvest investment philosophy. That philosophy focuses on leading companies in specific sectors or mega trends as the best place for investors to be if they want long-term capital appreciation prospects and income across market cycles.

Income Generation and Covered Calls

Income generation is another core element of the philosophy at work in Harvest’s equity income ETFs. That is achieved through a covered call strategy, generating a premium by agreeing to sell up to 33% of a holding at a set price. Using an active covered call strategy, Harvest’s team of portfolio managers generate consistent and high yields on their ETFs. As well, the value of call options tends to increase when volatility and uncertainty increase. The premiums generated by the covered call strategy act as some downside protection by the premium received. Continue Reading…