Stocks ticked lower to start the holiday-shortened week after wrapping up a losing month, quarter, and the worst first half in decades on Thursday. Moving into the second half of the year, HSBC’s global chief strategist, Joe Little, believes we are at or near “peak pain” on inflation, but data will not decline meaningfully until late in the year. The possibility of a recession, triggered by hawkish Fed policy shifts, remains the biggest threat to the outlook for the rest of the year.
The big question is, how do you protect your portfolio from 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.
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Global X Adaptive U.S. Risk Management ETF (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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