Volatility is always lurking
At Seeyond, we believe that if volatility needed a catchphrase, it could borrow the well-known remark from the 1984 science fiction movie The Terminator: “I’ll be back.” No matter how high markets climb, the risk of volatility is ever-present. As public health officials and governments worldwide continue to assess the scope of the potential damage from COVID-19 – and how to contain the outbreak – markets reacted unexpectedly, with the CBOE Volatility Index (VIX)3 hitting levels not seen in over a decade.
Human behavior guides markets
As risk managers, part our job is to serve as market behaviorists – working to track how trends in sentiment might inform broader market patterns. We have seen COVID-19-like investment patterns emerge relatively frequently – though typically with lower magnitude. When fear-inducing public events occur, it is import to remember that market participants are neither completely rational nor totally irrational. They are human beings prone to incorporating their own faults, behavioral biases, and sense of well-being into their investing habits.
In periods of volatility – particularly single-event and macro-driven volatility – investors are overcome by a primal fear we refer to as FOLO (Fear of Loss). FOLO tends to be most heavily associated with disasters (like the 2008 recession) and therefore tends to drive some of the most exaggerated investor behavior. The potential progression and final economic impact of COVID-19 remains unknown – but it has clearly impacted market sentiment and shaken consumer confidence. What’s more, spending behavior that is prevented by a public health emergency is unlikely to be replenished in subsequent quarters. In the meantime, governments and business try to find a way to balance public health with economic health.
Making human behavior work for your investments
For investors, it’s important to understand where markets are today, but also consider what might lie ahead. Those who lose track of their long-term timeline and allow fearful emotions to overtake their rationality tend to overreact. It’s import to keep in mind that losses in the present that occur to investors with 20+ years to retirement may well be a minor issue in the final analysis. What’s more, market corrections can present opportunities for active money managers to uncover attractive valuation and result in monetary policy actions designed to encourage growth.
Implications for portfolios
Market events such as the COVID-19 outbreak can serve as a reminder to investors. Diversification and active risk management can help portfolios contending with ever-present volatility risk.
MVIN incorporates a dual investment horizon approach that seeks to evaluate market volatility in both the long term (3 years) and short term (less than one year). This approach provides a balance between strategic and tactical portfolio positioning. At the end of February 2020, COVID-19 fears likely resulted in an overreaction from many market participants. These types of emotional behaviors are specifically what MVIN looks to target by exploiting a market anomaly, such as the low volatility anomaly. The low volatility anomaly dictates that low volatility stocks can yield greater returns than high volatility stocks over the long term.
In periods of pronounced volatility, we stay the course and rely on our existing positioning to get us through the turmoil. By design, minimum volatility strategies focus on building a diversified portfolio that has a lower sensitivity to the market – as expressed by a low beta relative to the market. When executed properly, these strategies can extract a fairly healthy amount of annualized alpha, which helps to keep fear in check.
2 Natixis Seeyond International Minimum Volatility ETF -7.43% YTD as of 2/28/20 as compared to -10.94% YTD MSCI EAFA Index (Net) as of 2/28/20.
3 The CBOE Volatility Index (the VIX) measures the implied volatility of the S&P 500® Index. The VIX is quoted in percentage points and represents the expected range of movement in the S&P 500 index over the next year. For example, if the VIX is 15, this represents an expected annualized change of less than 15%, up or down.
Performance data shown represents past performance and is no guarantee of, and not necessarily indicative of, future results. Total return and value will vary, and you may have a gain or loss when shares are sold. Current performance may be lower or higher than quoted. For most recent month-end performance, visit im.natixis.com. You may not invest directly in an index.
† Performance for periods less than one year is cumulative, not annualized. Returns reflect changes in share price and reinvestment of dividends and capital gains, if any. Market returns are based on the midpoint of the bid/ask spread at 4 p.m. ET and do not represent the returns an investor would receive if shares were traded at other times.
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Gross expense ratio 1.52% (Class Y share). Net expense ratio 0.55% (Class Y share). As of the most recent prospectus, the investment advisor has contractually agreed to waive fees and/or reimburse expenses (with certain exceptions) once the expense cap of the fund has been exceeded. This arrangement is set to expire on 4/30/21. When an expense cap has not been exceeded, the gross and net expense ratios and/or yields may be the same.
ETF General Risk: Exchange-Traded Funds (ETFs) trade like stocks, are subject to investment risk, and will fluctuate in market value. Unlike mutual funds, ETF shares are not individually redeemable directly with the Fund, and are bought and sold on the secondary market at market price, which may be higher or lower than the ETF's net asset value (NAV). Transactions in shares of ETFs will result in brokerage commissions, which will reduce returns. Active ETF: Unlike typical exchange-traded funds, there are no indexes that the Fund attempts to track or replicate. Thus, the ability of the Fund to achieve its objectives will depend on the effectiveness of the portfolio manager. There is no assurance that the investment process will consistently lead to successful investing. Equity Securities Risk: Equity securities are volatile and can decline significantly in response to broad market and economic conditions. Foreign Securities Risk: Foreign securities may involve heightened risk due to currency fluctuations. Additionally, they may be subject to greater political, economic, environmental, credit, and information risks. Foreign securities may be subject to higher volatility than US securities, due to varying degrees of regulation and limited liquidity. Currency Risk: Currency exchange rates between the US dollar and foreign currencies may cause the value of the fund's investments to decline.
Definitions of Terms Used in this Material
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Seeyond operates in the US through a participating affiliate arrangement with Natixis Advisors, L.P.
ALPS Distributors, Inc. is the distributor for the Natixis Seeyond International Minimum Volatility ETF. Natixis Distribution, L.P. is a marketing agent. ALPS Distributors, Inc. is not affiliated with Natixis Distribution, L.P.