Blackrock (iShares) had a wide-ranging blog post that included how to reposition in what it believes is a change in volatility regimes. The big idea is that last year’s extremely low volatility readings were, of course, going to end at some point and that the return to a higher volatility regime, whether that meant a “return to normal” or something else could have an undue influence on investors’ decision making.
An example of this could be overreacting to a small decline. Before February’s panic, many participants talked about 5-10% corrections being normal, that it was not uncommon to have one or even two of those per year. If that is true, then it probably doesn’t make a lot of sense for long-term investors (as opposed to traders) to try to trade around something that is a normal, regular market occurrence. Still, though, I think it is easy to envision some level of panic influencing long-term investors to the point that they reacted by selling unnecessarily.
If volatility is back, it makes sense for investors to ask themselves whether they should attempt to manage or smooth out their portfolio’s volatility. To my way of thinking, this is clearly part of an active investment strategy, but I would remind readers that active strategies don’t have to be implemented using only active funds they can be implemented with index (passive) funds. I’ve made the argument many times there is almost no such thing as truly passive investors (rebalancing is an active decision).
After citing risk factors related to demographics and one or two other things Blackrock very succinctly says “to barbell exposures, earning solid risk-adjusted carry from both securitized assets and the front-end of the U.S. Treasury curve. We attempt to capture upside with equity options that are still the most convex risk asset expression, in spite of slightly elevated premiums. We still favor EM assets…”
While I have no opinion on whether anyone should follow their advice the strategy can, of course, be created with exchange-traded products and can be done so quite narrowly. Pivoting to this week’s Barron’s, Mark Haefele from UBS believes that Germany and Japan are vulnerable to the tariff threats starting to unfold that for now are focused on steel and aluminum. The EAFE Index has almost 10% allocated to Germany and 24% to Japan.