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Summary

  • Equity beta, or equity volatility, is great on the way up, it’s on the way down that it is “bad”.
  • Often the word patience is ascribed to the task of investing and that is relevant here. To chase yield is to be impatient.
  • The task evolves into finding yield while still maintaining something close to fixed income beta.

Roger Nusbaum AdvisorShares ETF Strategist

Last week on the AdvisorShares Alpha Call, I had a chance to talk with Tim Gramatovich from Peritus Asset Management. During the call Tim made the argument for rates not going higher as many believe but staying where they are or even going lower-maybe even to 1.5% on the ten-year US Treasury.

If he turns out to be right then yields on things like money markets and fixed income proxies are going to stay frustratingly low and four basis points from a money market or 65 basis points for a two or three-year note is frustrating to advisors and their clients.

This backdrop creates the bullish argument for equities that provide investors 2, 3 or 4% from dividends or 6-7% from MLPs and maybe more from mortgage REITs. This is an important point because pound for pound those vehicles probably yield more than most fixed income proxies but they also take on equity beta or something much closer to equity beta than what investors are typically looking for from the fixed income-ish part of their portfolios.

Equity beta, or equity volatility, is great on the way up, it's on the way down that it is "bad." The difficulty that advisors face, and of course do-it-yourselfers, is remembering that equities will go down again and that the frustration that fixed income causes now will turn into gratitude in the next big downturn when investors again see the difference between equity beta and fixed income beta.

Whatever your favorite 4% yielding low beta stock is, it should be expected to go down to some degree. In a down 50% world, a stock that only goes down 20% looks pretty terrific in an equity beta context but an investor is very unlikely to feel good about a 20% drop in a fixed income holding.

Often the word patience is ascribed to the task of investing and that is relevant here. To chase yield is to be impatient. Markets have seen this behavior before and it ends badly.

The task evolves into finding yield while still maintaining something close to fixed income beta. Getting yield from the equity portion of the portfolio is a valid, proven and necessary approach but fixed income is fixed income not equity and there are market segments that provide some yield, not 5% from two-year treasuries like in the summer 2006 but better than a handful of basis points.

Advisors need to do the leg work to help their clients and individuals need to do the leg work to help themselves. This includes a lot of reading and a lot of studying of new products, which sounds like a lot except that just about every fund company has resources (both products and educational material) available to help. This obviously serves the fund companies' interests but there is also a legitimate need here as well. Segment we are talking about include floating rate, bank loan, high yield, active management, semi-active management and on and on.

Not easy but not impossible either.

Source: Get The Beta Right

Additional disclosure: To the extent that this content includes references to securities, those references do not constitute an offer or solicitation to buy, sell or hold such security. AdvisorShares is a sponsor of actively managed exchange-traded funds (ETFs) and holds positions in all of its ETFs. This document should not be considered investment advice and the information contained within should not be relied upon in assessing whether or not to invest in any products mentioned. Investment in securities carries a high degree of risk, which may result in investors losing all of their invested capital. Please keep in mind that a company’s past financial performance, including the performance of its share price, does not guarantee future results. To learn more about the risks with actively managed ETFs visit our website AdvisorShares.com. AdvisorShares is an SEC registered RIA, which advises to actively managed exchange traded funds (Active ETFs). The article has been written by Roger Nusbaum, AdvisorShares ETF Strategist. We are not receiving compensation for this article, and have no business relationship with any company whose stock is mentioned in this article.