When the Tide Goes Out

by Justin Lowry, President & CIO, Global Beta Advisors, LLC

As Warren Buffet famously said, “Only when the tide goes out do you discover who’s been swimming naked”. We are now beginning to see that unfold to begin 2022. The markets are on the cusp of correction territory as the S&P 500 is down nearly 8.5% year-to-date through 01/25/22.

If these levels hold through the final trading days of January, it will be the S&P 500’s worst month since March 2020. As one would imagine, the VIX has consequently seen a major tick up to the tune of nearly 81% year-to-date through 01/25/22.

SP500 up-down

“Only when the tide goes out do you discover who’s been swimming naked.” – Warren Buffet


S&P 500 Dip

SP500 January 2022

Source: FactSet Research Systems, 12/31/21 through 01/25/22



VIX Spike

VIX Spike January 2022

Source: FactSet Research Systems, 12/31/21 through 01/25/22


If these levels hold through the month’s final days, it will be the VIX’s largest spike since February 2020. This is important as VIX futures can provide some sort of leading indicator in terms of sustained pain in the market.

The short answer is the Federal Reserve. The 10-year treasury yield has shot up from a roughly 1.5% yield to an approximately 1.8% yield in the span of nearly one month. We believe this is due to the bond market pricing in an inevitable interest rate increase by the Federal Reserve. Increased interest rates generally lead to lower risk adjusted returns, which tend to make riskier asset classes less attractive to investors. We can see this proving out behaviorally within the S&P 500’s attribute by price-to-earnings:

U.S. 10-Year T-Note Yield (TPI)

US T-Note 10 Year Yield

Source: FactSet Research Systems, 12/31/21 through 01/25/22


S&P 500

Portfolio Average Weight Portfolio Total Return Portfolio Contrib. To Return
Total 100.00 -8.53 -8.53
PE Quintile 1: 26.4 – 1374.5 63.56 -11.90 -7.63
PE Quintile 2: 17.6 – 26.3 15.84 -4.90 -0.78
PE Quintile 3: 13.4 – 17.6 5.97 -3.29 -0.20
PE Quintile 4: 9.8 – 13.3 5.61 -1.60 -0.10
PE Quintile 5: 3.4 – 9.8 6.45 1.01 0.02
Negative PE 2.57 7.12 0.15

Source: FactSet Research Systems, 12/31/21 through 01/25/22


As you can see, nearly 90% of the index’s underperformance for the month of January has come from stocks with a price-to-earnings multiple of 26.4 or higher (i.e.:  ranking in the highest quintile in the S&P 500).  Even more amazing is that nearly two-thirds of the S&P 500 hold companies with a price-to-earnings multiple of 26.4 or greater.  As a result, we are seeing a natural rotation, not only out of companies with high valuations, but out of the S&P 500 in general as the index is so top heavy in companies with what we believe to be rich valuations.

Where Do We Go From Here:
We believe that uncertainty in the magnitude and the frequency of interest rate hikes that are expected to be employed by the Federal Reserve will likely continue to weigh on the market, curbing its upside potential.  We believe, at a minimum, the balance of the first quarter will be turbulent.  It may not be as turbulent as January, but we believe investors need to build guard rails, if they have not already done so.  We believe there are reasonably priced areas in the market where investors can stay invested in equity markets without suffering from its whiplash along the way.

In our opinion, it will be important for investors to create a balance of factors with a lean towards companies with lower systematic risk and those with cash to sustainably pay strong dividends.  Moreover, in a market environment where we believe valuations are going to be an important driver of performance, it is important that investors not overpay for exposure.


Global Beta Low Beta ETF Cumulative Return Chart
12/31/21 – 1/25/22: Global Beta Low Beta ETF Benchmark: S&P 500 – Gross Return

Global Beta Low Beta ETF Benchmark

Source: FactSet Research Systems, 12/31/21 through 01/25/22



Global Beta Smart Income ETF Cumulative Return Chart
12/31/21 – 1/25/22: Global Beta Low Beta ETF Benchmark: S&P 900 – Gross Return

Global Beta Smart Income Cumulative Return

Source: FactSet Research Systems, 12/31/21 through 01/25/22


The performance data quoted represents past performance and is no guarantee of future results. Investment return and principal value of an investment will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance data quoted. For the most recent month-end performance, please call (833) 933-2083.  Gross expense ratio .29%. 

Investors will incur usual and customary brokerage commissions when buying or selling shares of the exchange-traded funds (“ETFs”) in the secondary market, and that, if reflected, the brokerage commissions would reduce the performance returns. Shares are bought and sold at market price (not NAV) and are not individually redeemable from the fund. All performance figures assume reinvestment of dividend and capital gains at net asset value; actual returns may differ. Click here for standardized returns:  https://gbdv.globalbetaetf.com/

As you can see, our Global Beta Smart Income ETF has not only outperformed the market but has outperformed the Dow Jones US Select Dividend Index.  Our belief is that, although dividend paying stocks provide investors with exposure to value, our methodology takes it a step further and identifies companies with what we believe to be the best relative valuations.  We believe the same can be said about our Global Beta Low Beta ETF, as that has proven this month to provide better downside protection for investors.  The fund has not only provided risk mitigation relative to the market, but it has done so in excess of the S&P 500 Low Volatility Index.  Why?  We believe that risk mitigation should be more than just managing systematic risk, but rather, investors ought to be managing valuation risk.  As we have seen with this market in particular, there is a clear migration between growth stocks and value stocks, so we believe it is more important now than ever to manage that risk.

Definitions

S&P 900: The S&P 900 combines the S&P 500 and the S&P 400 to form an investable benchmark for the mid- to large-cap segment of the U.S. equity market.

Dow Jones Dividend Index: The Dow Jones U.S. Select Dividend Index aims to represent the U.S.’s leading stocks by dividend yield.

Price-to-earnings – the ratio of a company’s market capitalization versus its 12-month trailing earnings.

S&P 500 – an index of 500 leading companies and covers approximately 80% of available market capitalization.

VIX  – an index that measures expected market volatility, based on trading activity in S&P 500 futures contracts.

Before investing you should carefully consider the Fund’s investment objectives, risks, charges, and expenses. This and other information is in the prospectus or summary prospectus. A copy may be obtained by visiting www.globalbetaetfs.com or calling (833) 933-2083. Please read the prospectus or summary prospectus carefully before investing.

The fund’s primary risks:

Mid-Capitalization Securities Risk
The securities of mid-capitalization companies are often more volatile and less liquid than the stocks of larger companies and may be more affected than other types of securities during market downturns. Compared to larger companies, mid-capitalization companies may have a shorter history of operations, and may have limited product lines, markets or financial resources.

Concentration Risk
To the extent that the Target Index is concentrated in a particular industry, group of industries or sector, the Fund is also expected to be concentrated in that industry, group of industries or sector, which may subject the Fund to a greater loss as a result of adverse economic, business or other developments affecting that industry, group of industries or sector.

Dividend-Paying Securities Risk
The Fund’s emphasis on dividend-paying stocks involves the risk that such stocks may fall out of favor with investors and underperform the market. Also, a company may reduce or eliminate its dividend after the Fund’s purchase of such a company’s securities.

Large Capitalization Securities Risk
The securities of large market capitalization companies may underperform other segments of the market because such companies may be less responsive to competitive challenges and opportunities and may be unable to attain high growth rates during periods of economic expansion.

Distributor: Compass Distributor, LLC

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