Market volatility has swept across global markets, but year to date, gains in US equities continue.
But that hasn't stopped funds from preparing for volatility.
Firms are embracing actively managed ETS.
They also take it a step further with options-based ETSs, and these combine a core equity portfolio with options contracts to achieve specific portfolio objectives such as protection, income generation, or growth while managing risk and volatility.
Well, with a lack of economic data so far, will the rally in bonds continue?
Well, joining me to weigh in is Alexandra Flecker, chief revenue officer at Measured Risk Portfolios.
Alexandra, welcome.
Thank you so much for joining me.
Thank you for having me.
Well, 2025 has been quite the year when it comes to volatility across all risk assets.
So tell us about strategies for managing volatility.
Yeah, well, you're right, it's important to set the stage.
So far this year, the S&P 500 is actually up 15% or thereabouts, despite weathering a roughly 18% decline earlier this year.
So a lot of the conversations that I'm talking to advisers about have been how to keep investors allocated for long term compounding returns while keeping a focus on risk mitigation.
And today there's a lot of tailwinds continuing to drive the market, and they may be causing a lot of optimism.
However, those same reasons for Optimism can also cause excess, and we're seeing that in valuations.
If we look at the CAP ratio, for example, it's at its highest reading since 1999, which is causing a lot of hesitancy for individual investors to either stay in the markets according to their plan or to even step into the markets in the first place.
So a common solution that we're seeing is the advent of active professional management through the ETF wrapper.
So ETFs are a huge category.
They're roughly $10 trillion in size, with active ETFs only taking out about 8.5% of the total market share.
But year over year, active ETFs have actually garnered about 30% of net fund floats, with one of the most popular strategies being options-based ETFs.
Now these ETFs either offer additional leverage, a more precise risk reward profile, or a blend of both, but I think it really represents the dynamic shift in investor preferences away from maybe the more traditional passive ETF approach in lieu of something that's a little bit more dynamic that can succinctly adhere to individual investors' specific risk tolerances.
Yeah, and Alexander, when we're having a conversation about long term investment, I think it's also important to look at the macro landscape and the shifting landscape as well, and you mentioned active and also option based ETFs here.
So for viewers out there, tell us the why.
Well, the why is professional risk management.
Investors are looking for a way to stay invested to achieve that long-term compounding rate of return that is so desired to build up that ability to retire eventually at some point in the future, while remaining mindful of the real risk that the S&P 500, for example, can fall 50% or more in a relatively short period of time.
So the focus.
On upside opportunity with risk management is really the why for the active-based ETFs.
And also take us through some of the interest when it comes to short duration US Treasury that we're we view short duration US Treasuries as the risk free asset class.
In our particular strategy, the MRP synth quity ETF, we allocate the majority of assets to short duration US Treasuries for principal stability.
We want the majority of an investor's portfolio to be in a confidence inducing asset, a security that you can put your head on the pillow at night and go to sleep knowing that most of your portfolio is protected by the full faith and credit of the US government's ability to pay their short term debt obligations, which I still believe is considered risk free.
And you just mentioned that synth equity ETF.
So tell us what types of investors have actually shown interest in this right now.
Yeah, so all types of investors.
I like to say there's no bad time to buy syncity.
There's no bad portfolio positioning for synth equity.
However, it's just about managing expectations and how we build portfolios is with a combination of a 15% allocation of call options to synthetically replicate the performance of the S&P 500 for that.
Long term uncapped upside potential, but we do so with a floor on rolling 12 month losses by, as I mentioned, allocating the majority of assets to short duration US Treasuries.
So whether it's a retiree who's looking to keep their foot on the gas for growth and continue to generate long-term compounding returns even into the later stages of their investment life cycle, or the younger investor who might have greater liquidity needs, say, purchasing a house or putting a large down payment on something for their future.
Or equity can play a role in a variety of different investors portfolios.
Yeah, and speaking of which, given the rapid growth that you've seen with us and equity, what would you say are the key takeaways or lessons and what are the implications moving forward?
Yeah, the key takeaways are investors are looking for dynamic, active management internally.
What we do is when the market rises, we're actively selling call options into strength.
We're taking a portion of those gains and we're reallocating them back into the relative safety of treasuries, growing the risk mitigation bucket over time, protecting current gains against future potential market volatility, so that active management layer, the outsized allocation to the risk-free asset class, and the opportunity to drive long term compounding performance as if 100% of the assets were invested directly into the S&P 500, have really been the catalyst for investor interest.
And finally, Alexandra, before I let you go, of course we are reaching your end and we take a look at what's happened so far in Q1, Q2, as well as Q3.
So tell us about approaches when it comes to actually managing downside risks.
Yeah, well, you can use an actively managed strategy like the MRP and equity ETF.
Of course we hope that most investors would consider us, but no, it's just remaining mindful of the broader economic risks.
As I mentioned, valuations are elevated, keeping an eye out on a critical earnings season that's coming up that's going to set the tone for the rest of the year, looking out.
Corporate earnings through earnings, making sure that they're still growing, paying attention to geopolitical risks, paying attention to potential deregulation and tax cuts that may be coming to the White House, and of course potential Fed policy shifts from the Federal Reserve.
Well, a lot to keep our eyes on, so thank you so much for joining us today here at the New York Stock Exchange.
Thank you very much.
Appreciate it.
