EC Coronavirus Verus Market Beta

Recently, investors discovered the true meaning of an idea going viral. Fear of the coronavirus sparked a stampede to safe havens in the last week of February as new worldwide infections cropped up.

Investors holding Treasury paper and gold managed to soften the resultant blow to the equity side of their portfolios. Fixed income investments and bullion are touted as hedges because they’re not well-correlated to equities. Non-correlation is also the raison d'être of alternative investments, or “alts,” but in the recent beta-is-everything era, alts fell by the wayside, kicked to the curb by large-cap growth stocks.

It was big stocks that took it in the teeth in late February, though, as threats to global supply chains grew. The $50 billion iShares Russell 1000 Growth ETF (IWF), for example, shed more than 8.5 percent of its market value in the week ending February 26. Gold, proxied by the SPDR Gold Shares Trust (GLD), rose 1.4 percent while the value of the iShares 20+ Year Treasury Bond ETF (TLTwas yanked up 3.2 percent.

And alts? How’d they do? Well, that depends on which alt investment you held. Alts are not monolithic. There are long-short portfolios, currency plays and managed futures funds, to name but a few segments.

A diverse mix of five alts ETFs turned in positive results during the February equity selloff.

Topping the list with an 11 percent weekly gain was the VelocityShares Short LIBOR ETN (DLBR), a variably leveraged product that simulates a bearish bet on the U.S. dollar-denominated 3-month London Interbank Offered Rate. The note’s methodology derives an implied yield from a ladder of Libor futures with a weighted average tenor of one year.

There are a lot of gears and costs built into the DLBR product, so it’s definitely not a tool for beginners. Its volatility, too, can be offputting. Over the past year, DLBR’s standard deviation’s been on the high side of 28 percent, nearly twice that of the S&P 500. Still, judging from recent results, that risk may have very well been justified. From a diversification standpoint, DLBR delivered the most bang even if it was for a very expensive buck.

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Disclosure: None.

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