Volatility Returns

by: , Chief Investment Officer and Managing Director | IndexIQ

An inverted yield curve, the return of volatility, and “the regularity of unprecedented events”

No one can say this market hasn’t been interesting. From the fourth quarter of last year to the end of this summer, investors have seen a number of major moves in equities, both up and down. During the week of August 12th, stocks moved up or down more than 1% in four out of five days. Bonds, too, have been uncharacteristically exciting with yields on 10-year treasuries hitting record lows.

All this is to say nothing of the yield curve, a topic which brought seemingly millions of experts out of the woodwork in mid-August, sharing opinions ranging from doom and gloom to doom and/or gloom. What actually happened? The yield curve recently “inverted” (rates on 10-year Treasuries fell below those of 2-year Treasuries) raising legitimate concerns about a slowing economy. The yield on 30-year Treasuries also approached 2%. Taken as a whole, these kinds of events tend to make investors nervous, and the concurrent dip in stock prices on the news of this inversion reflected that.

Many investors may be starting to eye the exits. Unfortunately, history has shown that market timing has not proved to be very effective. Getting out of stocks when there’s a downdraft is one thing; getting back in at or near the bottom is something else. Mistiming these steps can have a serious impact on long-term returns.

So, this brings us back to the concept of and use case for liquid alternatives. It’s periods like these – where volatility is spiking and fear is growing – that liquid alternatives are designed to address. The IQ Hedge Multi-Strategy Tracker (QAI)*, for example, has a correlation of just 0.44 with the S&P 500 during months when the S&P 500 has had a negative return, so it provides the potential for solid diversification. As of August 16, 2019, the fund had substantial investments in various short-term fixed income instruments, but also had some exposure to equities, both domestic and in China, the Emerging Markets, and elsewhere. Multiple asset classes are represented across the fund, providing diversification.

Warren Buffett is credited with saying that, “Unprecedented events occur with some regularity, so be prepared.” It should come as a shock to no one that volatility returns, sometimes with a vengeance. Just since June 3, the CBOE Volatility Index (VIX), dubbed the “fear gauge” as a way of measuring the market’s expectations for the next 30 days, has been as high as 24.59 on August 5th and as low as 12.07 on July 24th. Between August 2nd and August 5th, it jumped almost seven points. Last Christmas Eve it stood at 36.07. Maneuvering around that kind of activity is not easy.

It’s human nature to want to do something, but when it comes to investing, it’s not always clear what to do or when. Having professional advice can help. Maintaining an exposure to proven liquid alternative strategies can play a major role in riding out market storms as well.

*Click on the fund name for the most current fund page, which includes, the prospectus, investment objectives, performance, risk, and other important information. Returns represent past performance which is no guarantee of future results. Current performance may be lower or higher. Investment return and principal value will fluctuate, and shares, when redeemed, may be worth more or less than their original cost. Visit nylinvestments.com/etfs and nylinvestments.com/funds and for the most recent month-end performance.

Past performance is no guarantee of future results, which will vary. All investments are subject to market risk and will fluctuate in value. Diversification does not ensure a profit or protect against a loss in a declining market.

This material represents an assessment of the market environment as at a specific date; is subject to change; and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding the funds or any issuer or security in particular.

The strategies discussed are strictly for illustrative and educational purposes and are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. There is no guarantee that any strategies discussed will be effective.

This material contains general information only and does not take into account an individual’s financial circumstances. This information should not be relied upon as a primary basis for an investment decision. Rather, an assessment should be made as to whether the information is appropriate in individual circumstances and consideration should be given to talking to a financial advisor before making an investment decision.

Correlation is a statistical measure of how two securities move in relation to each other. Perfect positive correlation (a correlation coefficient of +1) implies that as one security moves, either up or down, the other security will move in lockstep, in the same direction. Alternatively, perfect negative correlation (a correlation coefficient of -1) means that if one security moves in either direction the security that is perfectly negatively correlated will move in the opposite direction. If the correlation is 0, the movements of the securities are said to have no correlation; they are completely random.

The Chicago Board Options Exchange (CBOE) Volatility Index, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options. The VIX looks at expectations of future volatility, also known as implied volatility. Times of greater uncertainty (more expected future volatility) result in higher VIX values, while less anxious times correspond with lower values.

“New York Life Investments” is both a service mark, and the common trade name, of the investment advisors affiliated with New York Life Insurance Company. IndexIQ® is an indirect wholly owned subsidiary of New York Life Investment Management Holdings LLC and serves as the advisor to the IndexIQ ETFs. ALPS Distributors, Inc. (ALPS) is the principal underwriter of the ETFs. NYLIFE Distributors LLC is a distributor of the ETFs. NYLIFE Distributors LLC is located at 30 Hudson Street, Jersey City, NJ 07302. ALPS Distributors, Inc. is not affiliated with NYLIFE Distributors LLC. NYLIFE Distributors LLC is a Member FINRA/SIPC.

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Salvatore J. Bruno

Chief Investment Officer and Managing Director | IndexIQ

Sal is Chief Investment Officer at IndexIQ, where his primary responsibility includes developing and maintaining the firm’s investment strategies. Sal joined IndexIQ in 2007 from Deutsche Asset Management (DeAM) where he held a number of senior positions

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