What a rough day for the market last Friday, March 10, right? Well, not so much for investors holding negative beta assets.
The AGFiQ US Market Neutral Anti-Beta Fund (NYSEARCA:BTAL) is a great example. This ETF, which I covered for the first time with a buy rating in August 2022, was up more than 3% on Friday as of the writing of this sentence. Despite the knee-jerk rally that sent the share price within about a dollar of the 24-month peak, shaving off a bit of the upside potential, I believe that owning this fund makes sense for many investors today.
What is BTAL
As a recap, BTAL has the goal of providing “a consistent negative beta exposure to the US equity market”. In plain English, it means that BTAL’s main objective is to act as a hedge to stocks that can be valuable during times of market distress.
This anti-fragile fund does not have a sector bias. Rather, it invests across all industries, from consumer discretionary to consumer staples, but in long-short fashion: bullish stocks with low beta (ie, low sensitivity to stock market fluctuations) and bearish stocks with high beta. See allocation chart below.
Given BTAL’s investment strategy and portfolio structure, I think that investors can expect (1) strong diversification features and (2) roughly zero return or even small losses over the long term. This is pretty much what the ETF has offered to its investors in the past decade, as the chart below depicts.
Better than a high conviction play
No one should be overly excited about the prospect of zero gains over time. Therefore, I believe that BTAL as a standalone holding only works in the case of a high-conviction, short-term bet in favor of defensive stocks, which is almost the equivalent of believing that the stock market will likely face troubles ahead.
This is not a bad assumption, to be fair. As I have argued recently, two days before the collapse of SVB Financial (SIVB):
An economic slowdown is a near certainty, in my view. In fact, I don’t think that a recession has been this obviously telegraphed in many decades. The Fed has been crystal clear about how much it is willing to stall economic activity in order to slow down inflation. The yield curve is inverted like it hasn’t been in 40 years. (…) The mid-to-long term tendency is for the economy to grind and for interest rates to (eventually) plummet.
But investing out of personal convictions is one of my biggest professional pet peeves. No one has a crystal ball, and both the economy and the markets can always surprise investors, as they have in the past.
My interest in BTAL is for the superior risk-adjusted returns that it can help to produce when paired with the right asset. More specifically, the table below shows that a 60/40 portfolio allocated to the S&P 500 (SPY) and BTAL and rebalanced quarterly has performed substantially better than the broad equities market over the past ten years on a risk-adjusted basis:
- Sortino ratio of 1.79 vs. the S&P 500’s 1.42
- Maximum drawdown of 9.1% vs. the S&P 500’s 23.9% (using month-end data points)
In other words, I believe that BTAL is a great asset to own not for the returns that it can create, but for the risk that it can help remove from a portfolio. Risk is, in a way, the mirror image of returns, and I am equally excited about slashing it as I am about chasing profit opportunities.
Quick note for sophisticated growth investors
Those who paid closer attention to the table above may have noticed that the proposed 60/40 portfolio may have performed substantially better during the bear market, but not without a cost. Its annualized returns were 550 bps lower than those of the S&P 500 since BTAL’s inception.
Sophisticated growth investors may want to adapt the 60/40 portfolio described above to increase the expected return of the strategy without hurting its “efficiency” (ie, expected return relative to risk). The best way to do so, in my opinion, is to apply some leverage to the portfolio. This can be achieved by (1) going long S&P 500 futures contract for a notional amount that is higher than 60% of the portfolio’s value, or (2) buying enough S&P 500 calls options or LEAPS with a delta as close as possible to 1.0 .