Navigating Market Uncertainty: Insights on ETFs and Defensive Strategies

In midweek trade, we are looking at the Dow and S&P 500, well up by 0.5% point while the Nasdaq is rallying by 1%.

Now stocks were off to a sluggish start to the week and last week we saw the Nasdaq and S&P 500 hitting all-time highs, and investors may not be thinking about being defensive right now.

But with tariff uncertainty returning, maybe they may want to reconsider.

Well, joining me today to break all of this down is Todd Sohn, senior ETF and technical strategist at Strataus Asset Management.

Good morning, Todd.

Thank you so much for joining me.

So first and foremost, tell me why you think ETFs are a good market barometer.

Oh ETFs are a fantastic lens into the psychology of the market, right?

We can check every single day where money is going via flows, via volumes, and I would also put product launches in there too.

Each of those is a little bit of a bread crumb to what investors are doing with their money and with what issuers think.

I think is going to be the next hot wave of a trade of an asset class and whatnot, so we find a lot of different real-time data that we think is very helpful for understanding how the broader investor and markets feel about different asset classes going forward here.

It's a very timely sentiment indicator to us.

Yeah, and you mentioned a key word there and that is flow, so tell me what you're seeing when it comes to ETF flows.

Yeah, so what I find interesting is that since the April 8th market low, you've had a lot of restraint from ETF flows.

It just has not been as hot of an amount of money going to broader ETFs.

That's starting to change though because we are back to new all-time highs in the equity market.

You're starting to see demand for cyclical sectors pick up.

There's no demand for defensive sectors, and you've also seen.

Money start to come back and levered ETF assets.

So there's a little bit of more risk seeking behavior going on, but it's far, it is far, far shy of any sort of extremes we saw heading into the beginning of this year, which was technically wiped out by that whole April correction.

So I would, I would mark it as demand is accelerating, coming back for equity ETFs, but still shy of any sort of too hot of a temperature by artwork.

And in the current market environment, do you think investors need to redefine what defensive actually means right now?

Oh, absolutely.

Listen, if you took the sum of the defensive sectors in the S&P 500 staples, healthcare, utilities, energy, they're only about 20% of the index now.

That's a 35 year low.

So traditional defensives are not working anymore.

And so we strateti is still very strongly.

You need to think differently about how you position defensively.

One of our flagship funds is SAMT, the Strateggo's macro thematic ETF. has the ability to rotate themes and so that's our version of I think how you can actually play a little bit more defensive.

We can change the themes and the exposures within that ETF pretty frequently.

And so if you're looking for something differentiated from the S&P from growth exposures, we think that's a great way to consider it, or perhaps you go the route of buffered ETFs or managed futures.

Just look for different uncorrelated strategies to large cap growth which dominate the entire ETF space.

Yeah, and you just mentioned themes, so I do want to ask you, in addition to these strategies as well as active management involved, how can you deliver Alpha, given where we are right now as we head into the second half?

Yeah, I think you need to eliminate what was the traditional guardrails of style and size, right?

The markets are dominated by large cap growth stocks.

It's very tech Nvidia, Microsoft heavy type funds.

And if you look under the hood of many passive ETFs, they own a lot of the same names, and that's worked out great for investors.

But I do think if you're looking to add exposure to your portfolio and produce some alpha, you have to look for things that are less heavy on large cap growth and be more.

Affected by maybe what's going on international.

Look for international stocks.

Look for small cap stocks perhaps small caps have been in the bear market for 4 years.

Now you may not want to overload the whole portfolio with those exposures, but look for ETFs that at least have higher than normal exposure to those types of categories.

Don't be all in on large capital growth because that's not where you're going to find any sort of alpha.

We think it's in these other marginal corners that they ignored for quite some time.

And how do you think investors should be navigating the next several weeks given this tariff uncertainty and also tell us what you're seeing when it comes to bonds and in particular bond yields.

Yes, I feel very strongly that investors need to stay on the short end of the curve.

Long vol, long duration is very high volatility.

Long duration has not worked for quite some time.

We're going on multiple years now of poor performance for long duration, so stay down further on the short end of the curve.

Collect that income without any volatility.

And meanwhile, yes, if the market is prone to say some sort of summer pullback, maybe it's rate agitation, you're going to want to use those pullbacks to add exposure, whether it's the large caps, whether it's the thematic strategy, we're OK with that.

Uh, but in the meantime, continue to take.

Duration down, stay down the curve and take that long duration exposure you might have and put it into a small cap or an international exposure.

Put it in the thematic exposures.

We think that there's a much better risk return profile than sitting in long duration and having to worry about the impact of race because the volatility is just not worth it to us.

And very quickly before I let you go, in terms of the Fed rate outlook for the rest of this year, what's on your radar?

I would be surprised if you saw any sort of cuts.

The market is the equity market is strong.

You have financial strong.

It is very rare to see the Fed cut when bank stocks are actually at new highs.

That's only happened about once or twice in history.

And so the idea of placing in cuts, I think, is not quite warranted, especially if you have this creep higher in yields.

That's also going to tell you that maybe the cuts are off the table, but I defer to those bank stocks.

They're all acting very well.

And historically it is super rare to see a cut with the bank stocks at an all-time highs.

OK, Todd, well, we will have to leave it there but thank you so much for joining us this morning and thank you so much for sharing your insights.

Thanks very much.