Markets and economies move through multi-year periods of expansion and contraction. However, at 54%, secular bull markets have occurred only about half the time historically.1 Furthermore, the U.S. equity market has spent 70% of its time either in a bear market or recovering from one.2
The chart below highlights the secular bull and bear markets, where the shaded grey areas are the bull markets and the white areas are the bear markets. The S&P 500's average gain per annum during these secular bull periods was 13.8% vs. -4.0% annualized during the secular bear periods.
A Look at Secular Trends
Monthly Data, January 31, 1900 – March 31, 2018
Source: Ned Davis Research. Data as of March 31, 2018. Past performance is not indicative of future results. Data plotted to logarithmic scale. Copyright © 2018 Ned Davis Research, Inc. Further distribution prohibited without prior permission. All Rights Reserved. See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers, refer to www.ndr.com/vendorinfo.
Where the market is in the secular cycle becomes an important financial planning consideration for investors, especially as they near retirement and would begin to need investment income. An investor's approach to investing would typically vary depending on which secular period the market is in.
The Need to Navigate Secular Trends
The chart below helps illustrate the importance of navigating secular trends and, in particular, bear cycles. During bear periods, the greater the loss, the greater the gains needed just to break even. Managing the risk of deep and extended periods of loss is critical for long-term success and peace of mind. Limiting losses can help increase market participation by potentially reducing the amount of time and return needed to recoup such losses.
Gains Required to Recover from Losses
Source: VanEck. For illustrative purposes only. The figures shown above were achieved by means of a mathematical formula and do not reflect results of any one investment. They help illustrate how, for example, a 50% loss requires a 100% gain to recover that loss.
Prudent Asset Allocation
When you buy a stock, you are really buying its future earnings. Each share's price can be viewed as the discounted present value of its expected future earnings. Prices change when expectations change, which can happen for many reasons. However, the market's overall health may be gauged by measuring the trend and magnitude of industry-level price changes.
Different indicators can be applied to assess market health in order to help determine prudent equity allocations. One simple example of such prudence would be the aim to be fully invested when the overall health of the market is strong and rising and, as importantly, to reduce exposure to the market when it is weakening and declining.
An Investment Opportunity
Strategies that follow trends may be used to minimize downside market risk by, for example, signaling when to weight and underweight fully U.S. large cap equity market exposure. The Ned Davis Research CMG US Large Cap Long/Flat Index (NDRCMGLF) follows a proprietary model to measure market health and tactically allocate to U.S. equity to help perform with less risk than being fully invested 100% of the time. This guided allocation process is designed to help investors participate and preserve. Investors may complement their equity holdings by accessing this systematic trade strategy in a tax-efficient ETF.
VanEck Vectors® NDR CMG Long/Flat Allocation ETF (LFEQ™) seeks to track the NDRCMGLF Index. The NDRCMGLF Index is maintained by NDR, whose technical research experts have been developing trade strategies for institutional asset managers globally for more than 35 years. The co-indexer, CMG, is a registered investment advisor specializing in managing and executing trend-following trading strategies since 1992.
Important Definitions and Disclosures 1Source: Ned Davis Research. Data as of 3/31/2018. Secular bull and bear markets are based on the Dow Jones Industrial Average from 1900 to present. Secular trends are long-term periods of 10-25 years that can encompass shorter-term cyclical bull and bear markets. A secular bull market is a period in which stock prices rise at an above-average rate for an extended period and suffer only relatively short intervening declines. Secular bull markets are also typically accompanied by a favorable economic backdrop of low inflation and strong real economic growth. A secular bear market is an extended period of flat or declining stock prices, often accompanied by high or rising inflation and weaker real economic growth. New wealth creation opportunities are represented by the portion of returns that exceed those from market recoveries after market declines. 2Source: Ned Davis Research, S&P Dow Jones Indices. Data as of 3/31/2018. Based on price return, which excludes dividends. If calculated on a total return basis the figure would be 59%. Past performance is not indicative of future correlation or results. VanEck Vectors® NDR CMG Long/Flat Allocation ETF (LFEQ, or the “Fund”) provides risk-managed exposure to S&P 500 equites using multiple technical indicators that help determine when to be in the market and by how much. The Fund seeks to track its respective index, designed by Ned Davis Research, Inc. and CMG Capital Management Group, Inc. The indices listed are unmanaged indices and do not reflect the payment of transaction costs, advisory fees, or expenses that are associated with an investment in any underlying exchange traded funds. Index performance is not illustrative of fund performance. Fund performance current to the most recent month end is available by visiting vaneck.com. Indices are unmanaged and are not securities in which an investment can be made. Ned Davis Research CMG US Large Cap Long/Flat Index (the “Index”) is a rules-based index that follows a proprietary model developed by Ned Davis Research, Inc. in conjunction with CMG Capital Management Group, Inc. The model produces daily trade signals to determine the Index's equity allocation percentage (100%, 80%, 40%, or 0%). When allocated to a percentage of equities (long), that portion of the Index will comprise the S&P 500® Index. When allocated to a percentage of cash (flat), that portion of the Index will be allocated to the Solactive 13 week U.S. T-bill Index. Solactive 13-week U.S. T-bill Index is a rules-based index mirroring the performance of the current U.S. 13-week T-bill. S&P 500 Index consists of 500 widely held U.S. common stocks. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. The Fund is subject to risks associated with equity securities, index tracking, investing in other funds, operational, U.S. Treasury bills, market, high portfolio turnover, fund shares trading, premium/discount risk and liquidity of fund shares, passive management, absence of prior active market, authorized participant concentration, trading issues and concentration risks. The Fund is considered non-diversified and may be subject to greater risks than a diversified fund. The Fund is not sponsored, endorsed, sold or promoted by Ned Davis Research, Inc. (“NDR”) or CMG Capital Management Group, Inc. (“CMG”). NDR and CMG make no representation or warranty, express or implied, to the owners of the Fund or any member of the public regarding the advisability of investing in securities generally or in the Fund particularly or the ability of the Index to track the performance of equities market. NEITHER NDR NOR CMG GUARANTEE THE ACCURACY AND/OR THE COMPLETENESS OF THE INDEX OR ANY DATA INCLUDED THEREIN AND NEITHER NDR NOR CMG SHALL HAVE ANY LIABILITY WHATSOEVER FOR ANY ERRORS, OMISSIONS, OR INTERRUPTIONS THEREIN. NDR AND CMG MAKE NO WARRANTY, EXPRESS OR IMPLIED, AS TO RESULTS TO BE OBTAINED BY LICENSEE, OWNERS OF THE FUND, OR ANY OTHER PERSON OR ENTITY FROM THE USE OF THE INDEX OR ANY DATA INCLUDED THEREIN. NDR AND CMG MAKE NO EXPRESS OR IMPLIED WARRANTIES, AND EXPRESSLY DISCLAIM ALL WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE WITH RESPECT TO THE INDEX OR ANY DATA INCLUDED THEREIN. WITHOUT LIMITING ANY OF THE FOREGOING, IN NO EVENT SHALL NDR OR CMG HAVE ANY LIABILITY, JOINTLY OR SEVERALLY, FOR ANY SPECIAL, PUNITIVE, INDIRECT, OR CONSEQUENTIAL DAMAGES (INCLUDING LOST PROFITS), EVEN IF NOTIFIED OF THE POSSIBILITY OF SUCH DAMAGES. The S&P 500 Index is a product of S&P Dow Jones Indices LLC and/or its affiliates and has been licensed for use by Van Eck Associates Corporation. Copyright © 2018 S&P Dow Jones Indices LLC, a division of S&P Global, Inc., and/or its affiliates. All rights reserved. Redistribution or reproduction in whole or in part are prohibited without written permission of S&P Dow Jones Indices LLC. For more information on any of S&P Dow Jones Indices LLC's indices please visit www.spdji.com. S&P® is a registered trademark of S&P Global and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC. Neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors make any representation or warranty, express or implied, as to the ability of any index to accurately represent the asset class or market sector that it purports to represent and neither S&P Dow Jones Indices LLC, Dow Jones Trademark Holdings LLC, their affiliates nor their third party licensors shall have any liability for any errors, omissions, or interruptions of any index or the data included therein. Fund shares are not individually redeemable and will be issued and redeemed at their net asset value (NAV) only through certain authorized broker-dealers in large, specified blocks of shares called creation units and otherwise can be bought and sold only through exchange trading. Shares may trade at a premium or discount to their NAV in the secondary market. You will incur brokerage expenses when trading Fund shares in the secondary market. Investing involves substantial risk and high volatility, including possible loss of principal. An investor should consider the investment objective, risks, charges and expenses of the Fund carefully before investing. To obtain a prospectus and summary prospectus, which contains this and other information, call 800.826.2333 or visit vaneck.com. Please read the prospectus and summary prospectus carefully before investing.
This content is made possible by VanEck; it is not written by and does not necessarily reflect the views of InvestmentNews' editorial staff.