Stocks ticked higher in early trading as investors awaited critical results from the Fed policy meeting, which concludes this afternoon. According to the CME Group’s FedWatch, the market is now pricing in a 95% chance of a 75-basis-point rate hike. Fed officials were reportedly contemplating a larger-than-usual rate hike following May’s red hot CPI reading, released last week.
“The change in the headline from 50 basis points to 75 basis points reflects a stark reality, but it also reflects the Fed’s determination to underscore its commitment to its mandate to maintain price stability,” said Quincy Krosby, chief equity strategist at LPL Financial. “It’s neither a trial balloon nor a lead balloon – it’s reality.”
Treasury yields, which have popped this week in anticipation of the big policy meeting, pulled back this morning. The 2-year rate, which is most sensitive to monetary policy shifts, surged 40 basis points earlier this week to its highest level since 2007.
Many of the pros on Wall Street predict continued volatility in the coming months as the Fed’s battle against inflation and the dance between equities and bond yields intensify. The big question now is – how do you make the most of what’s coming? Today we’ll discuss the risk-on/risk-off strategy that the pros on Wall Street use when they want to benefit from movement in both stocks and treasuries.
Global X Adaptive U.S. Risk Management ETF (ONOF) is the risk-on/risk-off strategy that the pros on Wall Street use when they want to benefit from movement in both stocks and treasuries.
ONOF is a passively-managed portfolio that provides exposure to the S&P 500 when conditions look more favorable but rotates into short-term (1-3 year) Treasuries when market conditions look bad.
The methodology for this fund is a little more complicated than what you find in the typical ETF. The idea is that it looks at various technical indicators to make an allocation decision. The index is based on historical data from two short-term indicators: Moving Average Convergence Divergence (MACD) and the level of the CBOE Volatility Index (VIX), as well as two long-term indicators: 200-day Simple Moving Average (SMA) and market drawdown percentage.
The trigger threshold for each signal is based on a predetermined Z-score. If the portfolio is in equities, it takes three negative indicators to switch the exposure to Treasuries. Once in Treasuries, it takes two positive indicators to switch to equities, thus, creating a higher hurdle to get out of the market than it is to enter. Based on the strategy, turnover in the portfolio should be higher than a buy-and-hold approach.
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