The CBOE Volatility Index (VIX) is down about 26% for the year, but investors shouldn’t assume there won’t be market fluctuations ahead, especially with quantitative traders increasing their activity as of late.
Quants who base their trading decisions on mathematical formulas are returning to the markets after last year’s bearish turn. With the major stock market indexes ticking higher this year, it spells opportunity.
“Goldman Sachs is urging investors to cushion themselves from the possibility of increased volatility in the next few months as Wall Street quants dive back into US stocks,” a recent Bloomberg report said.
It’s not just macroeconomic influences like higher inflation and rising interest rates that are adding to the volatility of the major stock market indexes. The Bloomberg report also noted that quantitative trading action has picked up as a result of a relatively less volatile first quarter.
“Quant investors have swooped into equities as strong first-quarter earnings and resilient growth in the US has kept a lid on volatility,” the report added. “The Cboe Volatility Index (ticker VIX) has been below the 20 level since late March. This has pushed the exposure of systematic investors to above neutral for the first time since December 2021, according to Deutsche Bank calculations.”
However, quant traders, when acting in large numbers and positions, could help add to volatility. Just like recession fears and bank rescues could add to major market movements from retail investors looking to sell off their positions, large institutional investors who employ quant traders could amp up the volatility tenfold during heavy selling action.
Tame Volatility With Active ETFs
Like their mutual fund counterparts, active ETFs can give investors more dynamic exposure to the markets. This means the ETF’s holdings can be adjusted to gain or reduce exposure to certain holdings given their performance.
Portfolio managers can tailor the fund’s holdings when market conditions suggest that a change is necessary. Thus, when volatility strikes, they can sell or add holdings based on what they think is best to maximize the fund’s performance and/or limit losses.
Investors can obtain this active management strategy in a variety of ETFs that cater to stocks, bonds, and other assets. As such, consider a pair of active ETF options from T. Rowe Price such as the U.S. Equity Research ETF (TSPA) and the T. Rowe Price QM U.S. Bond ETF (TAGG).
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