What’s Ahead:
- The S&P 500 has led the bull market, but concerns of high equity valuations and stubborn volatility warrant a fresh look at risk management.
- Structured Notes are more accessible than ever, and professional portfolio management can take advantage of investment opportunities.
- We feature a new strategy focused on growth that can pivot as markets shift.
Does it feel like tech stocks are the only things working in todayโs investment market? Maybe so. After all, the Nasdaq Composite returned 30% in 2024, dividends included. Specifically, the Magnificent Seven stocks were up 48% last year, and that followed a +76% increase in 2023. To be clear, earnings growth for todayโs biggest tech companies is impressive, perhaps unprecedented, helping to fuel the euphoria around the mega caps.
The Long View
Zoom out, however, and we find that since 2020, asset classes have taken turns outperforming. For instance, gold was the leader during a tumultuous 2020. The U.S. stock market led the way in 2021 amid a period of easy monetary policy and animal spirits. Yet 2022 was an entirely different story; both stocks and bonds were taken to the woodshed, thanks to post-pandemic inflation and central banks around the world that were forced to hike interest rates. Commodities were the place to be back then, as Russiaโs invasion of Ukraine sparked fears that materials and natural resources of all sorts would be in short supply. The next year came a โMag 7โ renaissance and, eventually, some stabilization in the Treasury market. That broad trend carried through for the first half of 2024, but small caps and even international bonds gained ground into the U.S. elections. Bonds, meanwhile, have fallen recently since the Federal Reserve (Fed) began cutting rates last September.
Intermarket Volatility Across Investment Types Since 2020
Source: Portfolio Visualizer
A New Story to Unfold?
So, what does the next market cycle have in store? Thatโs the million-dollar question, but with U.S. equity valuations north of 20x earnings, and significantly positive inflation-adjusted interest rates, the case can be made for diversification and expert portfolio management. Add to the mix stock market volatility that just doesnโt seem to back away, and the situation could be ripe for a different approach.
Diversification by Investment Vehicle
Structured Notes are often thought of as a defensive vehicle to capture high yield. While thatโs certainly part of their label, Notes can also be used for growth. The NewEdge Structured Note Advisory Portfolio (SNAP) seeks to offer a carefully curated selection of several notes, implemented across market sell-offs. This approach takes advantage of and harnesses volatility spikes which, all too often, otherwise lead investors to make poor decisions with their portfolios. Risk is managed through generally short-duration Notes, and the strategy aims for tax simplicity.
SNAP is just one of many Structured Note portfolios that todayโs investors, with the help of a financial advisor, can include in their asset mix. One approach may be to swap a long equity fund for SNAP; over the course of a full market cycle, the productโs fixed return schedule is designed to achieve equity-like returns with relatively less risk. Whatโs great about Notes is that thereโs the potential for positive performance even when the underlying indices have negative returns. Moreover, growth-focused Structured Notes can offer enhanced performance due to their payoff profiles. Housed within a broad strategy like SNAP, downside principal protection and upside participation are prioritized.
An Evolving Marketplace, Driven by Technology
Returning to the original chart, a Structured Note portfolio could offer ballast if markets face a rockier stretch in the years ahead compared with the past two-plus years of seemingly straight-up stocks. An expertly managed portfolio with clear mandates can tap an array of cap sizes, geographies, and styles. Whatโs more, given the health of todayโs credit markets, spreading out investments across multiple issuers is relatively easy. Not only are macro conditions conducive to low-credit risk, but todayโs growing Structured Note marketplace means costs have come down markedly from decades ago.
Portfolio Management, Tactical Executions
Along with structural changes working for the benefit of retail investors, tried-and-true strategies such as laddering can be executed within a professionally managed portfolio like SNAP. Should Treasury rates rise further, a portfolio manager can invest in new, higher-yield notes or pounce on opportunities in either value-based or growth-centric markets. Also, the momentum factor has become increasingly prevalent in recent cycles, so simply including a Note tied to high-momentum stocks is a possible choice.
The Bottom Line
Investors are not relegated to the S&P 500 for access to growth; other asset classes and new investment vehicles are available to effectively diversify a portfolio. SNAPโs capital appreciation objective, tax efficiency, and targeted return and risk levels can be ideal for certain investors looking for expert active management in todayโs high stock market valuations and stubborn volatility.
Please see our Halo Disclosure Page for important disclosures
An investment in Structured Notes may not be suitable for all investors. These investments involve substantial risks. The appropriateness of a particular investment or strategy will depend on an investorโs individual circumstances and objectives.
Content and any tools discussed are provided for educational and informational purposes only. Halo Investing makes no investment recommendations and does not provide financial, tax, or legal advice. Any structured product or financial security discussed is for illustrative purposes only and is not intended to portray a recommendation to buy or sell a particular product or service.
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