Mike Philbrick, chief executive officer, ReSolve Asset Management

FOCUS: Exchange-traded funds 

MARKET OUTLOOK:

Inflation, often termed “the silent thief,” poses a subtle but profound threat to traditional stock-bond portfolios. As the general price level rises, the real purchasing power of money diminishes. While this erosion is palpable for consumers, the implications for investors can be multifaceted.

A notable aspect during inflationary periods is the changing correlation between stocks and bonds. Traditionally, these assets of conventional portfolios have shown a low to negative correlation. In periods when equities faced challenges, bonds sometimes provided diversification, and vice versa. However, as evident in 2022, these correlations might adjust. Inflationary pressures can prompt central banks to modify interest rates, impacting both bond and equity markets. Such moves could influence portfolio diversification and returns, and after accounting for inflation, real returns for investors can vary substantially.

In these turbulent waters, certain alternative strategies can emerge as a beacon of hope for investors. For example, managed futures strategies, with their ability to invest long or short across diverse futures contracts in commodities, currencies, bonds, interest rates and equity indices have the potential to capitalize on rising prices or falling asset prices. This unique “long and short” flexibility enables them to potentially profit from both upswings and downswings in various markets. Coupled with their trend-following nature, they may capture sustained market movements, regardless of their direction. In doing so, managed futures historically have exhibited a low correlation with traditional assets.

This characteristic was especially evident in 2022 when stocks and bonds moved in tandem due to inflationary pressures and many managed futures strategies contributed to improved portfolio diversification.

It’s important for investors to remember that enhancing portfolio diversification reduces portfolio risk. Diversification aims to balance investments so that when some “zig” and underperform, others “zag” and offset potential losses, leading to more consistent returns and reduced portfolio volatility – in other words, a smoother ride.

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TOP PICKS

Horizons Marijuana Life Sciences ETF (HMMJ TSX)

It seeks to replicate, to the extent possible, the performance of the North American Marijuana Index, net of expenses. The North American Marijuana Index is designed to provide exposure to the performance of a basket of North American publicly equal-weighted with significant business activities in the marijuana industry. The proponents of "marijuana prohibition" continue to modernize their views due to public support for recreational pot legalization being strong and widespread. This combined with the lack of performance and the low level of investor exposure combine to make this sector potentially attractive.

Evolve Global Healthcare Enhanced Yield ETF (LIFE.B TSX)

It seeks to replicate the performance of the Solactive Global Healthcare 20 Index. This provides exposure to the largest global healthcare companies classified under the FactSet Sector Health Technology on an equally weighted basis. Also it writes covered call options on up to 33 per cent of the portfolio securities in order to mitigate downside risk and create yield to the portfolio. The level of covered call option writing may vary based on market volatility and other factors.

Vanguard Communication Services ETF (VOX NYSEARCA)

It seeks to track the performance of the MSCI US Investable Market Index (IMI)/Communication Services 25/50. The fund employs an indexing investment approach designed to track the performance of the MSCI US Investable Market Index (IMI)/Communication Services 25/50. An index made up of stocks of large, mid-size and small U.S. companies within the communication services sector, as classified under the GICS. The index construction held approximately 19.97 per cent exposure to META, 11.84 per cent exposure to GOOGL, 9.8 per cent GOOG with all other individual holdings below five per cent as of July 31, 2023.

PAST PICKS: April 3, 2023

SPDR S&P Semiconductor ETF (XSD NYSEARCA)

• Then: US$205.29
• Now: US$202.06
• Return: -2%
• Total Return: -2%

Purpose Gold Bullion Fund ETF (KILO TSX)

• Then: $29.84
• Now: $28.59
• Return: -4%
• Total Return: -4%

WisdomTree Japan Hedged Equity ETF (DXJ NYSEARCA)

• Then: US$70.94
• Now: US$88.84
• Return: 25%
• Total Return: 26%

Total Return Average: 7