This week, we’re giving you a trade alert for the Undiscovered portfolio, which, as we’ve noted, trades more frequently than the strategic allocations.
In the 30% slot in the Undiscovered portfolio:
- Sell all VanEck Morningstar Intl Moat ETF (MOTI)
- Buy 30% AGFiQ US Market Neutral Anti-Beta ETF (BTAL)
With this trade, you’ll get exposure to the spread return between low- and high-beta stocks.
This fund aims to generate positive returns regardless of the direction of the general market, as long as low-beta stocks outperform high-beta stocks.
So, what does that mean, in English?
High-beta stocks are those that are significantly more volatile than the index they’re benchmarked against. For example, a stock with a beta above 2 will generally move twice as much as the broader market.
A low-beta stock is one that is less volatile, and has fewer price swings, than the wider market. Here, you’re looking for a beta under 1. A low beta generally means that a particular stock is considered less risky, but the flip side is a lower potential return.
The fund uses long and short positions to achieve its objective. It typically goes long in low-beta U.S. equities and takes short positions in high-beta domestic equities.
The idea is to construct a “dollar neutral” portfolio. At its most basic, that means holding both long and short positions on the same underlying security.
This fund can be used as an equity hedge to lower portfolio volatility and reduce the impact of drawdowns. You could consider it an alternative to buying Treasuries, which reduce your risk, but also deliver a low return.
In a volatile market, such as the one we’re experiencing now, this ETF gives you a chance to book some gains despite the whipsaw action.
In the current market conditions, simply going long equities is riskier than finding a way to hedge using ETFs or options. That won’t always be the case, but for the moment, notching gains requires a more tactical approach.