3 equity solutions that can help cushion the downside
With the stock market near all-time highs, investors and their financial advisors may be re-evaluating their equity portfolios and looking for solutions that may help prepare for inevitable pullbacks in the market.
At this stage in the market cycle, valuations have begun to look somewhat stretched as we enter the ninth year of this bull market. For most investors, the focus is not on volatility, but on the potential for an eventual equity market correction. Even in good years, sizeable intra-year drawdowns are a normal feature of the market. Over the past ten years, intra-year drops have averaged 16.8%, despite positive returns in seven of these years.
Market corrections are normal S&P 500 intra-year declines vs. calendar year returns
To help you navigate today’s uncertain environment, we focus on three equity solutions designed to deliver upside participation with lower volatility, helping investors get invested—and stay invested.
Equity Income Fund: A conservative approach pays dividends
Today’s steady economic backdrop, coupled with increasing corporate profits, is a great environment for a stock picker to identify attractively-valued companies that can grow their business. When investing for the long term, investors may wish to consider stocks with both growth in their underlying business and an above-market dividend yield. Over time, this combination can provide access to both forms of equity return—capital appreciation and dividend income. As always, these considerations may not be suitable for all long-term investors.
The JPMorgan Equity Income Fund targets high-quality U.S. companies with attractive valuations and healthy dividends, with the aim of providing lower volatility access to stock market growth. Our focus on identifying stocks with a modest payout ratio is a key part of our investment process, as these companies retain enough capital after paying dividends to invest for future growth.
This approach has served us well as we have seen a return of volatility in the energy and materials sectors. In the energy sector, companies such as Chevron and Occidental Petroleum are among our top ten holdings in August 2017.
Hedged Equity Fund: Hedge the equity market without timing it
In the face of a potential market correction, investors may find themselves with a conflicting set of objectives: they are keen to have equity exposure, but want to limit the risk that comes with it; yet at the same time, they are reluctant to swap equity risk for rate risk by building fixed income into their overall asset allocation. That’s where hedged equity strategies come in.
Hedged equity (or options overlay) strategies are designed to deliver higher risk-adjusted returns than broad-based equity indexes, using options to minimize the impact of market disruptions and downturns, rather than to leverage the portfolio.
Our hedged equity strategy delivers a very similar risk profile to a 60% equities/40% fixed income balanced fund, but without incorporating fixed income—and the duration risk that comes with it. By seeking to minimize the ups and downs of the market, hedged equity strategies can help investors stay invested during volatile periods. The introduction of a downside hedge means that investors have less ground to make up when the market declines and, by staying invested, can grow their assets over the long term.
We use our proprietary Dividend Discount Model to rank stocks into quintiles based on normalized earnings. Next, we apply a disciplined index options strategy, hedging the portfolio against risk in adverse markets. Since we are not trying to time the market, we keep this hedge in place 100% of the time, resetting it each quarter. The result is a conservative equity solution that targets a smoother ride for equity investors by giving up some upside potential in exchange for a hedge against falling markets, with roughly half of the volatility and beta of the S&P 500 Index.
JPMorgan Diversified Return U.S. Equity ETF: Seeking a smoother ride in U.S. equity markets
Built on decades of proven experience, proprietary research and insights, J.P. Morgan’s suite of equity ETFs tracks a disciplined, two-part index methodology that aims for lower volatility and better risk- adjusted returns than passive market cap-weighted ETFs.
- Disciplined portfolio construction: Market cap-weighted indices are generally more exposed to sectors that have performed well in the past, not necessarily those likely to perform well in the future. Our methodology takes a more intelligent approach—more evenly distributing risk, across sectors and regions.
- Multi-factor security screening: By identifying and strategically combining the historical drivers of outperformance, we then use a bottom-up stock filter to screen stocks based on up to four criteria, including value, momentum, size and volatility.
The key to this “multi-factor” approach is to maximize the diversification—and, as a result, more effectively allocate sources of risk—between factors.
Looking for a smoother ride in the U.S. equity market?
With equity valuations becoming stretched and uncertainty abounding, a market correction may not be that far off. It’s therefore crucial now—more than ever—to make sure you’re positioned to take advantage of the opportunities arising in the market, while navigate through this inevitable volatility.
Learn more here about these three equity solutions which may help cushion investors’ portfolios on the downside and provide a smoother ride in the U.S. equity market.
The following risks could cause the funds to lose money or perform more poorly than other investments. For more complete risk information, see the Fund prospectuses.
Investing involves risk, including possible loss of principal. Investment returns and principal value of an investment will fluctuate so that an investor’s shares, when sold or redeemed, may be worth more or less than their original cost. There is no guarantee the Funds will meet their investment objectives. Diversification may not protect against market loss.
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