Strategy Spotlight: Why Managing the Downside is Critical

Not the First Bear Market, Not the Last

The S&P 500 index dropped close to 35% in a month earlier this year, representing one of the most violent selloffs in U.S. equities since the Great Depression. While stock markets have rallied since that time, they remain well below all-time highs that were established just prior to the downturn taking hold.

Bear markets of this magnitude are unnerving but are not uncommon. There have now been 12 corrections of 20% or more in the past 90 years, according to Cornerstone Research. This includes the market crash of 1929, Black Monday in the fall of 1987, and, more recently, the Tech Wreck of the early 2000s and the Great Financial Crisis in 2008-09.

In all 11 instances prior to this year, market losses from these corrections were fully recouped after an average period of 79 months or just over six and a half years. But individual recovery times were largely dependent on the magnitude and duration of the pullback, with the biggest drawdowns resulting in the longest recoveries.

Less is Often More

Reducing drawdowns can help to preserve wealth, dampen volatility and reduce the time and return needed to fully recoup losses. But attempting to time the market to achieve these goals may end up doing more harm than good.

While tactical adjustments including larger allocations to cash may help minimize losses during a correction, it is important that investors maintain a well-diversified portfolio through all phases of a full market cycle. This includes strategic weightings to stocks and bonds, as well as other non-correlated asset classes and/or long-short liquid alternative strategies that can help mitigate downside risks even further when they arise.

Why AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF (QBTL)?

The strategy’s market neutral structure invests long in U.S. stocks that have below-average betas and shorts U.S. stocks that have above-average betas, within sectors. While there are market circumstances under which the strategy may provide positive returns when broader equity markets are rising, it is designed specifically as an equity hedge to gain when stocks fall – as was the case recently. This makes the strategy well-suited to be a long-term strategic holding as well as short-term tactic that helps investors manage through the ebb and flow of unpredictable markets.