April 14, 2024
Commodities, short bonds show market momentum beyond equities


US Equities (^GSPC, ^DJI, ^IXIC) have enjoyed a tech-led rally over the last few months, with some indexes reaching record highs. However, as a possible correction looms, investors may seek avenues to position their investments away from tech.

Allianz Investment Management Head ETF Market Strategist Johan Grahn and AlphaSimplex Chief Research Strategist Katy Kaminski join Yahoo Finance to discuss safe investments and sectors still experiencing momentum.

Grahn explains that risk-mitigating ETFs may benefit cautious investors: “They provide a structure inside of an ETF that gives you upside exposures. If you buy them today, you can still make money on the upside, up to a certain level, like a cap, but you’re buffered underneath on the downside. So if the market is down and you have options, either 10% or 20%, you don’t lose any money over a defined outcome period, so over 6 months or 12 months for example. So you can partake in the market, but you don’t have to go all the way into the market. “

However, the market is still seeing momentum beyond equities, Kaminski explains: “We’ve seen divergence across commodities. We’re following things like cocoa. We’re following things like corn, and also soybeans, pretty large trends there which may start telling us where inflation could be going next. If we start seeing that revert, which we have seen a little bit this month, there’s some chance that inflation higher could provide some interesting opportunities in the commodity sector, but also short bond positioning is also interesting right now –– this idea that cuts are possible coming later this year, rather than sooner. “

For more expert insight and the latest market action, click here to watch this full episode of Yahoo Finance Live.

Editor’s note: This article was written by Nicholas Jacobino

Video Transcript

And so there’s viewers right now. They’re listening. They’re wondering what do they do with their money.

One strategy you talk about are these kind of risk mitigating ETFs. Explain what those are, Johan, and maybe some examples as well.

JOHAN GRAHN: Yeah, I mean, it’s kind of cool because you have a market now that feels a little toppy, a little peaky. There’s a little bit of nervousness coming into it at least at this table. But you also have a lot of investors out there still bullish.

There’s still this pressure coming up from underneath. The irony is that you have a ton still. A ton of cash on the sidelines.

So people are clearly nervous with how they’re voting with their dollars. No question. So the buffer ETFs that you’re referring to structured ETF defined outcome ETFs. They provide a structure inside of an ETF that gives you upside exposure.

So if you buy them today, you can still make money on the upside up to a certain level like a cap, but you’re buffered underneath on the downside. So if the market is down by– you have– and you have options here, either 10% or 20%, you don’t lose any money over a defined outcome period. So over six months or 12 months, for example. So you can partake in the market, but you don’t have to go all the way into the market.

JULIE HYMAN: Well, and you refer to a lot of cash on the sidelines. I would submit that, yes, people might be nervous and keeping money there. But they’re also making money, gaining interest in money market funds, for example, for the first time in a long time. So how does something like a money market fund compare to something like you’re talking about?

JOHAN GRAHN: Yeah, sure. So if you think about it this way, if you’re in a money market fund, you’re getting income, that’s getting taxed, and you still have inflation. So there’s not a ton of juice left even if you get 5% from it. The buffer ETF that I’m talking about, if you have a 10% buffer, in other words, the market can come down by 10%, and you’re still made whole, you have an upside cap the last fund that we had now about 17%.

So you can make 17%. And the opportunity cost is the difference between the 17 and the five if the markets continue. Being in a money market, when the market’s rallying, you have to make a decision to give up that opportunity cost.

JOSH LIPTON: These kind of buffered ETFs you’re talking about. How do they sort of fit into the overall investors’ portfolios?

JOHAN GRAHN: Well, it’s a very versatile product. And you don’t have time for my whole answer. So I’ll keep it short.

JOSH LIPTON: Yeah, the cliff notes.

JOHAN GRAHN: Cliff notes. If you’re looking to retire, or if you have retired, and you’re starting to think about reallocating your portfolio to be a little bit more conservative, typically, you move equities from equities into bonds or cash, high level speaking.

You don’t have to. You can still have access to the equity risk premium. You move money from pure equities to buffered equities.

You take some risk off the table. But you don’t kiss all your equity positions goodbye.

JULIE HYMAN: And, Katy, to get back to the momentum idea for a moment here, are there pockets where you are seeing a special momentum right now? And what are signs that is breaking?

KATY KAMINSKI: This is a good question. I mean, I think we’ve been so focused on equities that there has actually been some interesting trends out there that we’ve been watching, particularly in the commodity sector. You’ve seen a lot of divergence there.

You’ve seen energies up quite a bit today. I don’t know if you saw there was some pretty sizable moves. But we’ve also seen negative positions and short views in the agricultural sector, and very disparate interesting opportunity sets that are going to lead to very different possibilities for thinking about inflation.

So we’ve seen divergence across commodities, we’re following things like cocoa, we’re following things like corn, and also soybeans. Pretty large trends there, which may start telling us where inflation could be going next. If we start seeing that revert which we have seen a little bit this month, there’s some chance that inflation higher could provide some interesting opportunities in the commodity sector.

But also short bond positioning is also interesting right now. This idea that cuts are possibly coming later this year rather than sooner.

JULIE HYMAN: Interesting stuff.

KATY KAMINSKI: Interesting stuff.

JULIE HYMAN: Yeah, cocoa, I know it’s been a rocket ship.

KATY KAMINSKI: 27% in February.

JULIE HYMAN: Yeah, I saw some charts. I think our Jared Blikre has a chart comparing it to NVIDIA. So that tells you something right there.



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