3 ways to navigate U.S. equity volatility - J.P. Morgan Asset Management
CLOSE

3 ways to navigate U.S. equity volatility

Contributors Jonathan Sherman, Yazann Romahi

With volatility firmly back on the agenda in U.S. markets, how can equity investors navigate a less choppy course?

After a volatile December, including narrowly avoiding what would technically be considered a bear market, markets have bounced back in 2019, illustrating just how dynamic the markets can be. Even in good years, sizeable intra-year drawdowns are a normal feature of the market. For example, over the past ten calendar years, intra-year drops in the S&P 500 Index averaged 13.2%, despite positive returns in seven of these ten years — and an average annual return of 15% over this period.* Prudent equity investing remains critical to achieving long-term investment goals.

MARKET CORRECTIONS ARE NORMAL

S&P 500 INTRA-YEAR DECLINES VS. CALENDAR YEAR RETURNS


Source: J.P. Morgan Asset Management, FactSet, Standard & Poor’s; as of 12/31/18. Intra-year drops refer to the largest market drops from a peak to a trough during each calendar year from 2009 to 2018; they are based on price index change only and do not include dividends. *Average annual return of the S&P 500 Index for the 10 years ended 12/31/18 includes reinvestment of dividends and capital gains Guide to the Markets —U.S. Past performance does not guarantee future results.


To help you navigate today’s uncertain environment, we focus on three equity strategies designed to deliver upside participation with lower volatility, helping investors get invested—and stay invested.

1. Invest in a high-quality dividend approach

An approach that targets high-quality U.S. companies with attractive valuations and healthy dividends may provide lower volatility access to stock market growth. Look for active managers who focus on identifying stocks with a sustainable payout ratio—an important consideration, as these companies retain enough capital after paying dividends to invest for future growth.

Despite the economic backdrop, it is still a good environment for stock pickers to identify attractively-valued companies that can grow their business. Over the long term, the combination of both growth in their underlying business and an above-market dividend yield can provide access to both forms of equity return—capital appreciation and dividend income.

2. Hedge your exposure to the equity market

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.

Look for a hedged equity strategy that delivers a risk profile similar to that of 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, using a downside hedge means that investors have less ground to make up when the market declines and can stay invested.

3. Seek a “smarter” index

While an index ETF can provide you with broad exposure to the U.S. equity market, there are some ETFs that utilize a smart — or strategic — beta approach, applying a disciplined index methodology to their strategic beta equity ETFs that aims for lower volatility and better risk-adjusted returns than passive, market cap-weighted ETFs. These managers may focus on one or both of these principles:

  • 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. To take this into consideration, some smart beta managers apply a methodology which more evenly distributes risk across sectors and regions.
  • Multi-factor security screening: By identifying and strategically combining the historical drivers of outperformance, smart beta managers may use a bottom-up stock filter to screen stocks based on various criteria — known as factors — including value, quality and/or momentum.

The key to a multi-factor approach is to maximize diversification—and, as a result, more effectively allocate sources of risk—between factors. That’s why it’s important to select an active manager with decades of experience, proprietary research and insights.

With equity volatility continuing and uncertainty abounding, it’s crucial now—more than ever—to ensure your portfolio is positioned to take advantage of opportunities in U.S. equity markets, while maintaining a cushion on the downside.

Looking for ways to navigate the U.S. equity market and stay invested?

J.P. Morgan offers three equity solutions which may help cushion investors’ portfolios on the downside while providing a smoother ride in the U.S. equity market.

Learn more about JPMorgan Equity Income Fund

Learn more about JPMorgan Diversified Return U.S. Equity ETF (JPUS)

Learn more about JPMorgan Hedged Equity Fund

See how these three funds compare


RISK SUMMARY

ETFs and mutual funds are different investment vehicles. ETFs are funds that trade like other publicly traded securities. Similar to shares of an index mutual fund, each ETF share represents an ownership interest in an underlying portfolio of securities and other instruments typically intended to track a market index. Unlike shares of a mutual fund, shares of an ETF may be bought and sold intraday.

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.

Hedged Equity Fund: Utilizing a strategy with a diversified equity portfolio and derivatives, with a Put/Spread Collar options overlay, may not provide greater market protection than other equity investments nor reduce volatility to the desired extent, as unusual market conditions or the lack of a ready option market could result in losses. Derivatives expose the Fund to risks of mispricing or improper valuation and the Fund may not realize intended benefits due to underperformance. When used for hedging, the change in value of a derivative may not correlate as expected with the risk being hedged.

JPMorgan Diversified Return U.S. Equity ETF (JPUS): ETF shares are bought and sold throughout the day on an exchange at market price (not NAV) through a brokerage account, and are not individually redeemed from the fund. Shares may only be redeemed directly from a fund by Authorized Participants, in very large creation/redemption units. For all products, brokerage commissions will reduce returns. The Fund uses derivatives, which may be riskier than other types of investments and may increase the volatility of a fund. The Fund may not track the return of its underlying index for a number of reasons, such as operating expenses incurred by a fund that are not applicable to an index, and the time difference between calculating the value of an index and the net asset value of a fund.

Equity Income Fund: The prices of equity securities are sensitive to a wide range of factors, from economic to company-specific news, and can fluctuate rapidly and unpredictably, causing an investment to decrease in value. There is no guarantee that companies will declare, continue to pay or increase dividends.

Related funds

Equities for Tough Times
Three equity solutions designed to deliver upside participation with lower volatility on the downside.