Next-generation ETFs could play pivotal role in navigating downturns

Learn how a new generation of ETFs seeks not only broad exposure to equities, but the ability to reduce that exposure at critical junctures, such as a market downturn.

As ETFs evolve, we believe their value proposition improves, with new product iterations playing bigger roles in long-term portfolio outcomes than their predecessors.

To date, ETFs are best known for providing broad, low-cost exposure to asset classes. Those benefits could be considerable and have helped make the investment vehicle a staple in many portfolios. But standard passive ETFs typically mimic the performance of an investment index – nothing more, nothing less.

A new generation of ETFs seeks not only broad exposure to equities but the ability to reduce that exposure at critical junctures, such as a market downturn. If successful, the portfolio benefits could go far beyond low expense ratios.

“If you’re holding a traditional passive ETF in a market downturn and lose 45% of your assets, how inexpensive was it? I view that as incredibly expensive,” says Vance Howard, CEO and founder of Howard Capital Management.

Mr. Howard’s firm just launched two new ETFs – the HCM Defender 100 Index ETF (NYSE ticker: QQH) and HCM Defender 500 Index ETF (NYSE ticker: LGH) – that take a dynamic approach to investing in the NASDAQ 100 and S&P 500 indices. Both products rely on quantitative models to identify a potential rising or declining stock market and adjust exposure to the indices accordingly.

Based on those models, the ETFs can have full exposure to equities, assume a 50/50 allocation between the respective index and one- to three-month Treasury bills, or fully invest in short-term Treasury bills. The goal is not to perfectly time the tops and bottoms of markets but to avoid the bulk of a downturn and catch most of an upturn in equites.

“We have built two ETFs to capitalize on the dynamic changes taking place with the advancement of technology. We believe speed is going to be a critical component of any trading strategy now and in the future, and the need to be faster while seeking to reduce risk in down-trending markets is vital,” says Howard Capital President Bill Martin.

The quantitative process used to identify when to enter or exit equities is the same proprietary process Howard Capital has used in separate accounts for the last 20 years. It identified downward inflection points after the dot-com bubble in the early 2000s and during the financial crisis in 2008-2009.

Mr. Howard believes that by sidestepping a bear market, these new ETFs can potentially create better outcomes for advisors and their clients than traditional buy-and-hold products.

“A passive, index-based ETF can’t change its stripes. It has to hold stocks all the way to the bottom,” Mr. Howard says.

He points to the financial crisis as an example of the devastating impact that kind of rigidity can have. If an investor rode the market down from the beginning of the downturn, for many, it meant seven years of investing before they got back to the pre-fall starting line.

“That means you’re spending nearly a quarter of your working life not making any money in the stock market,” he explains.

When, not if

Howard Capital Management’s ETFs have been launched at a time when many advisors are looking at downside risk management in their portfolios. The current bull market run has lasted more than a decade, the longest such streak in history. With those returns in the rearview mirror, the way a portfolio weathers the next downturn could go a long way in defining its investors’ experience over the next decade, Mr. Howard says.

While no one can predict when the next bear market will occur, Mr. Howard believes advisors and their clients could benefit from having investments in place that use a quantitative process for identifying downturns. A disciplined, mathematical approach can help remove the emotions that often negatively affect investor behavior when markets are volatile. A computerized process can also speed up reaction time, he explains.

“It may not seem like it, given the length of the current bull market, but bear markets are a common part of investing,” Mr. Howard says. “There have been 25 of them since the Great Depression of 1929. Utilizing faster, computerized trading trends might allow investors to be more confident about their portfolios.”

Investors should carefully consider the investment objectives, risks, charges and expenses of the HCM Funds. This and other important information about the Funds is contained in the prospectus, which can be obtained at or by calling 770-642-4902. The prospectus should be read carefully before investing. HCM Defender 100 ETF and HCM Defender 500 ETF are distributed by Northern Lights Distributors, LLC, member FINRA/ SIPC. Northern Lights Distributors, LLC and Howard Capital Management, Inc. are not affiliated.

Important Risk Information
Exchange Traded Funds involve risk including possible loss of principal. Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress. ETFs trade like stocks, are subject to investment risk, fluctuate in market value and may trade at prices above or below the ETFs net asset value. Brokerage commissions and ETF expenses will reduce returns. There is no guarantee that the Fund will achieve its objective. Securities in the Index or in the Fund’s portfolio may underperform in comparison to the general securities markets or other asset classes.

3921-NLD-12/19/2019 FR2019-1219-0101

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Next-generation ETFs could play pivotal role in navigating downturns

Next-generation ETFs could play pivotal role in navigating downturns

Learn how a new generation of ETFs seeks not only broad exposure to equities, but the ability to reduce that exposure at critical junctures, such as a market downturn.


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