There’s been a ton of buzz recently around an impending threat
— and massive hiring freezes and layoffs indicate that one is right around the corner.
There are several things people should think about when it comes to preparing for a recession, such as paying off high-interest debt and building up a savings account.
But I want to spend some time explaining how I strategically invested my money while keeping this uncertain macroeconomic environment in mind.
I create personal finance and investing online content – mostly short videos. I earned a bachelor’s degree in finance and economics from the University of Tennessee and worked as a financial analyst for three years at a healthcare company. I now create personal finance and investing content full time and have amassed 900,000 followers on my social media platforms in just two years.
I always watch TACK – an exchange traded fund that follows the market
On March 23, 2022, Fairlead Strategies launched an ETF (exchange-traded fund) called Fairlead Tactical Sector ETF – or “TACK” for short.
TACK is an ETF that tracks three market characteristics that are extremely important to observe and act on in times of strong
- Trend tracking: This usually means observing and reacting to market trends in this case by observing mathematical indicators based on moving averages.
- Overbought/oversold: This recognizes whether a specific security is overbought (historically trading too high) or oversold (historically trading too low).
- Relative strength: This assesses the price performance of one security relative to another using a price-to-price ratio, in this case applied to sectors versus the broader market.
Once a month, the ETF is rebalanced to reflect Fairlead’s findings regarding these characteristics. This directs the ETF either “risk-on” or “risk-off”.
What risk means
When the ETF is deemed to be “at risk”, it aims to take advantage of the return of the S&P 500. It does this in the simplest way possible – holding other ETFs that represent the sectors that make up this index, concentrated in those with the best trends.
In case you don’t all know, there are 11 sectors that make up the S&P 500. All of these sectors can be individually invested through ETFs offered by various companies. So when TACK wants to rely on the performance of the S&P 500, it holds proportional weightings in the eight strongest ETFs shared below:
- The Communication Services Industry (XLC)
- The consumer discretionary sector (XLY)
- The consumer staples sector (XLP)
- The energy selector (XLE)
- The financial sector (XLF)
- The health sector (XLV)
- The industrial sector (XLI)
- The Materials Sector (XLB)
- The real estate sector (XLRE)
- The Technology Sector (XLK)
- The Utilities Sector (XLU)
How to have the best chance of outperforming in the long term
Think of it like this – we all know an ETF is easily explained as “a basket of stocks”. By investing in an ETF, you are buying into a “basket” that contains dozens (sometimes hundreds) of individual stocks. An ETF, or basket, can contain hundreds of stocks.
Since this ETF is made up of other ETFs, you can think of it as “a basket of other baskets”. This “basket” is full of other “baskets”, including the 11 economic sectors that make up the stock market.
Theoretically, by focusing on the major sectors that the S&P 500 holds, you will have a chance of outperforming over a long period of time.
What does risk aversion mean?
However, when Fairlead Strategies identifies a weak point in the markets, it turns away from risk and migrates to the following ETFs:
SPDR Gold Trust (GLD)
SPDR Portfolio Long-Term Treasury ETF (SPTL)
SPDR Portfolio Short Term Treasury ETF (SPTS)
Here is a good breakdown of the ETF:
“Fairlead Tactical Sector ETF (the “Fund”) seeks capital appreciation with limited downsides. A downside is the amount of investment value lost during a significant market decline, here related to the equity market, measured peak to trough The Fund seeks to limit drawdowns to preserve capital, so that more can be reinvested once the market bottoms.
“Our methodology attempts to proactively identify market declines. If successful, this process should position the Fund in more defensive sectors and assets before market declines deepen, thereby limiting downside. “
Overall, the fund’s strategy is designed to benefit from sector leadership during uptrends while minimizing downside risk during downtrends.
To add color around this statement, since the launch of TACK in late March, the S&P 500 is down -18%. On the other hand, TACK only trades at -4% – producing over 14% alpha relative to the markets.
Here’s more information if you want to see the specific holdings inside the ETF that have allowed them to outperform the market since inception.
What I do with this information
Including this ETF in my portfolio is a no-brainer. As I shared in my Substack post over the past seven months, I have been hoarding money in anticipation of a major market correction. I am currently sitting around a 30% cash position in my active portfolio.
Given this impending recession, ongoing talk of supply chain issues, and inflation eating away at corporate earnings (Target and Walmart in particular) – continued market volatility is all but certain.
If we look back in time, the 200 week exponential moving average has done a fantastic job of marking the market “down” or near it. Of course, no one can predict which way the stock market will move. However, if we do fall below this moving average (when the S&P 500 is trading below around 3,260), there is no telling what will happen and for how long.
To mitigate my downside risk while remaining exposed to the market, when and if the S&P 500 trades below this figure, I will move most of my cash position into this ETF. Considering it’s really a “no man’s land” below this moving average, I have no idea how volatile the market is when trading below it. Assuming TACK will be “risk free” if this occurs, my downside risk during the heightened volatility should be limited.
Austin Hankwitz is a former financial analyst and full-time investment content creator.