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Market volatility is back, and advisors are fielding more questions on how to protect their portfolios. For those with stocks south of the border, the solutions may include strategies to hedge the U.S. equity market.

Globe Advisor spoke recently with Bill DeRoche, chief Investment officer at AGF Investments LLC and head of AGFiQ Alternative Strategies in Boston, about ways to lower portfolio volatility and reduce the impact of drawdowns. Mr. DeRoche is also a manager of AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF QBTL-T, designed for investors who are looking for a strategic or tactical hedge for equity portfolios.

How would you characterize what we’re seeing in the market today?

It’s a little bit different than your traditional equity drawdown event. Typically, the concern is we’re heading toward a recession and interest rates and inflation are falling. That doesn’t appear to be on the horizon. We’re looking at inflation expectations peaking in the coming months and interest rates rising. We think that long-duration assets could get hit – both fixed income as well as equities. We’re seeing some of that already with some high-beta equities coming down significantly since November.

What are you suggesting clients do in this type of market?

We’re suggesting to a lot of our clients that maybe they reconsider or adjust some of the “insurance” they have in their portfolios to mitigate some of the potential equity drawdowns. We do have a strategy that’s long low-beta securities, and short high-beta securities, which is AGFiQ US Market Neutral Anti-Beta CAD-Hedged ETF.

How does it work?

We have 200 equally weighted positions in the long portfolio and 200 equally weighted positions in the short portfolio. These are names in the Russell 1000 Index. The strategy rebalances quarterly. We’re ranking on beta, but it’s done within sectors, so we’re not going to have a huge sector bet in the portfolio. As of Jan. 28, the ETF also changed to an active, rules-based strategy from a passive index-tracking strategy.

How should advisors explain this to interested clients?

It’s definitely a different type of investment in that it’s a tool to be used in the portfolio. It’s an “insurance” product that’s designed to zig when the market zags. You want to combine it with core equities.

For example, if you’re looking to recreate the return and risk profile of a 60-40 equity fixed income portfolio, you’re looking in the neighbourhood of 75 per cent core equity and 25 per cent in this strategy. Over the past 15 years, you would’ve ended up with something on the return front [as the 60-40 portfolio] with just a little less risk.

We think there’s a place for this in a portfolio at all times. In a risk-on environment, you’d be looking to reduce the position, but as you get into a more risk-off environment, this would be an asset that you’d be looking to add to reduce some of your allocations to long-duration fixed income.

This interview has been edited and condensed.

– Brenda Bouw, special to The Globe and Mail

Must-reads from Globe Advisor this week

What are the biggest mistakes made in RRSP season?

Clients rushing to meet their registered retirement savings plan (RRSP) deadline this time of year may be a ritual to try to max out their contributions and reap tax savings, but it can come with all kinds of problems like the temptation to invest in the “flavour of the month” to not contributing at the optimal rate. Mary Gooderham speaks to advisors about why contribution decisions need to focus on investment goals, portfolio management and long-term tax strategies.

U.S. mutual fund companies jump on active ETF bandwagon

Active ETFs have been slowly gaining ground in Canada for the past decade, but with regulatory changes in the U.S., more mutual fund companies are set to launch transparent ETFs this year on the back of Catherine Wood’s success with ARK Innovation ETF. Shirley Won takes a deep dive into how the U.S. products differ from the Canadian ones and what advantages they have.

Does it make sense to make RRSP contributions in your 60s?

More people are leaving their career jobs and doing something else in their 60s before full retirement. What does this mean for RRSP contributions when their marginal tax rates in their 60s may be higher or lower than when they’ll be forced to convert the account into a registered retirement income fund (RRIF)? Alison MacAlpine looks at the pros and cons of making contributions and converting funds in the most tax-favourable manner.

Why making portfolios net-zero hasn’t taken off

With the interest in environmental, social and governance products and strategies taking off in recent years, there are ways investors and advisors can take their efforts even further by measuring the carbon emissions from their portfolios and offset those by purchasing carbon credits. But making portfolios carbon-neutral has yet to catch on. Joel Schlesinger digs into what’s holding investors back and where demand is headed.

Also see:

How advisors can help clients ‘live the life they want’ with sudden windfalls

Top advisors reveal what it takes for those starting out in the industry

Modern family dynamics create more complexity in financial planning

World’s first DeFi ETF to launch in Brazil next month

First black woman nominated to Fed board faces rocky confirmation

What you and your clients need to know

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Have you considered adding pronouns to your corporate signature to show gender diversity? Even though supporting such a cause seems to be the norm in workplaces, gender discrimination still persists. Juliette Baxter reports on how employers can normalize the use of pronouns among leaders and champions to create a shift in work culture.

You can work from home, but should you?

Many employers are now providing flexible working arrangements, but how worried are you that if you work from home too much you could miss out on opportunities to advance your career? Jared Lindzon looks at how the “proximity bias” and fear of missing out will drive more Canadians back to the office, but also affect employee sentiment.

Bombarded and exhausted by e-mail?

Do you think that e-mail overflow continually changes your mental focus? Is reducing e-mail the best way to reduce having to grapple with different topics? Harvey Schachter reports on how we can battle cognitive exhaustion and create boundaries that prevent your inbox from stressing you out.

- Compiled by Globe Advisor staff

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