- Flows into exchange-traded funds that hedge the market are surging as volatility is starting to pick up.
- AdvisorShares’ CEO explains the strategy behind 2 short ETFs that returned over 20% in the 2018 and 2020 market crashes.
- And he shares 3 other ways to use ETFs to play a more erratic market environment.
After a year of flows mostly leaving AdvisorShares’ hedging exchange-traded funds while the bull market raged on, the tide is turning.
In the last three months, $4.5 million has flowed into AdvisorShares’ $29 million Dorsey Wright Short (DWSH) ETF, according to etfdb.com. Over the last 12 months, the fund has seen outflows of $37.5 million.
For the same period, $15 million has flowed into their $71 million Ranger Equity Bear (HDGE) ETF, although the fund is still showing a net outflow $20 million over a 12-month period, according to etfdb.com.
This isn’t surprising, as the bullishness that has buoyed markets this year has started to lose some luster.
In recent weeks, markets have grappled with a range of issues, from surging inflation to China’s second largest property developer Evergrande facing default, to an energy crisis sweeping through Europe and Asia and a battle over the raising of the US government debt ceiling.
The combination of events caused September to be the worst month for stocks this year. The NASDAQ fell 5% for its worst month since March 2020 and the Dow Jones Industrial Average (DJIA) dropped 4% for its worst month this year.
This was a rude awakening for some investors, as it served as a reminder that markets don’t always only go up. With this in mind, some investors are turning to the ETF space for hedging opportunities.
Considering markets have been in a raging bull market for the last decade, it’s impressive that both ETFs have even managed to survive.
“It’s tough when you look at performance, since inception, not so great,” said Noah Hamman, CEO of AdvisorShares. “But you look at those times when you would want this kind of hedging tool and it’s done well for your portfolio.”
During the COVID-19 market crash, the DWSH ETF returned 74% between February 19, 2020, and March 23, 2020, compared to the S&P 500’s 34% decline.
This strategy is managed by Dorsey Wright & Associates, a firm famed for their point and figure analysis. The ETF uses technical analysis to highlight the stocks with the highest momentum and relative strength, it then flips it and shorts those stocks. The approach is purely technical and based on price movement and the stock’s ranking within its peer group.
Alternatively the HDGE ETF uses an active approach to shorting managed by short seller Brad Lamensdorf who uses a combination of technical and fundamental analysis to select companies to short while also setting pre-targeted entry and exit points.
During the COVID-19 market crash, HDGE returned 48%.
When a bear market occurred in 2018 between September and December, where the S&P 500 declined 19%, HDGE returned 24% and DWSH returned 34%.
Hamman compares using these ETFs within the portfolio to how society approaches the weather on a day-to-day basis.
“It’s a little cloudy outside, cloudy for your portfolio, you might have a little bit of a hedge on,” Hamman said. “If it’s clear that there’s rain coming, you’ll put a lot more of a hedge on. But it’s not always cloudy, and it’s not always raining and so you don’t always need an umbrella with you and in some sense, that’s how a short fund like this works.”
In recent times, bear cycles have been shorter in nature, but the ETFs still do well in those periods and are a helpful tool for hedging, Hamman said.
And just because the markets turned volatile doesn’t mean every investor needs to go “extreme bear” in their portfolio. Hamman also shares three other AdvisorShare ETFs that perform well in a more rocky environment.
The SENT ETF launched in February and already has over $71 million assets under management.
It uses machine learning to uncover the digital sentiment of companies and then invests in the companies expected to surprise the market with breakout performance.
While following sentiment might seem like a momentum strategy suited to a bull market, it also uses an options overlay in the portfolio to keep it hedged if there’s a real drawdown, Hamman said.
Since inception, the ETF has returned 10% to investors.
This ETF strategy offers a tactical asset allocation approach, Hamman said.
Launched in December 2020, QPX can invest in a broad variety of equities across market capitalization and sectors, but can also use various fixed income categories and commodities to manage risk.
When markets get volatile, the ETF can quickly move to cash, or cash-equivalent fixed-income products, to manage risk, while also having all the benefits of an ETF, such as tax and operation efficiencies, Hamman said.
Year-to-date the fund has returned 18%.
3) Cannabis and psychedelics sectors
AdvisorShares offers three ETFs in this space. Even though they are seen as higher-risk, more volatile stocks, Hamman said these ETFs are bucking the trend and experiencing robust inflows.
The cannabis sector has experienced a number of tailwinds in recent weeks surrounding regulation. In addition, Senate Majority Leader Chuck Schumer and Senator Cory Booker are also aiming to pass broader legislation with a social justice focus that would expunge the records of individuals arrested for non-violent minor cannabis incidents.
“Investors are still sort of piling into [this category], they see [it] as this early 90s, late 80s, emerging tech space, a growing industry that has a lot of upside ahead of it,” Hamman said.