Stocks slipped in early trading as investors processed an onslaught of mixed mega-cap earnings results and readied themselves for crucial economic data releases. The latest reading of the Case-Shiller Home Price Index is due this morning, along with new home sales data and the consumer confidence report.
Meanwhile, the market prepared for the outcome of the two-day Federal Reserve policy meeting that commences today. At its mid-June meeting, the central bank lifted its short-term target range by 75 basis points— the most significant hike since 1994. A similar steep increase is expected heading into this month’s meeting, with some economists expecting a 100 basis point hike.
With many pieces to the puzzle still forming, market expectations for the rest of the year remain unclear. Today we’ll discuss the risk-on/risk-off strategy that allows investors to maintain exposure to equities in a positive environment and mitigate the extent of drawdowns while remaining invested as much as possible.
Global X Adaptive U.S. Risk Management ETF (ONOF) is designed to maintain exposure to the equity markets when the environment is positive and then move to a risk-off position when that trend reverses. The passively-managed portfolio provides exposure to the S&P 500 when conditions look favorable but rotates into 1-3 year Treasuries when market conditions look bad. The strategy seeks to mitigate the extent of drawdowns while remaining invested in equities as much as possible.
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.
Should you invest in ONOF right now?
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