Market Volatility Got You Spinning?
Stock market volatility is a key characteristic of financial markets that investors must navigate. While some view volatility as a risk factor, others see it as an opportunity. Regardless of perspective, understanding its causes and potential strategies for managing it can be beneficial.
One such strategy involves Stratified ETFs, such as the Stratified LargeCap Index ETF (SSPY) and Stratified LargeCap Hedged ETF (SHUS), which use a sector-equal-weighted approach to portfolio construction. This method differs from traditional market-cap-weighted ETFs and may offer an alternative way to allocate capital in volatile environments.
Defining Stock Market Volatility
Stock market volatility refers to the degree of variation in stock prices over time. It is commonly measured using statistical tools such as standard deviation and the VIX (Volatility Index), which gauges expected price fluctuations in the S&P 500. A high volatility level indicates larger price swings, while low volatility suggests a more stable market.
Volatility is influenced by multiple factors, including macroeconomic conditions, corporate earnings, and market sentiment. While it can create uncertainty, it also plays a role in price discovery and investment returns.
Factors Contributing to Volatility
Several elements can contribute to market fluctuations:
- Economic Data & Monetary Policy – Inflation rates, GDP growth, and Federal Reserve interest rate decisions often impact investor sentiment and stock prices.
- Corporate Earnings & Sector Performance – Individual company performance, as well as broader sector trends, can drive volatility, particularly when earnings results deviate from expectations.
- Geopolitical and External Events – Elections, trade policies, geopolitical conflicts, and regulatory changes can introduce market uncertainty.
- Market Structure & Trading Activity – Factors such as algorithmic trading, liquidity shifts, and changes in investor behavior can contribute to short-term price movements.
Given these influences, investors use different strategies to manage exposure to volatility, including diversification and alternative weighting approaches.
How SSPY and SHUS Approach Portfolio Construction
Traditional ETFs that track indices like the S&P 500 typically use market capitalization weighting, meaning larger companies represent a greater share of the portfolio. This can lead to sector concentration, where a small number of large stocks disproportionately impact performance.
Stratified ETFs, including SSPY and SHUS, take a different approach:
- Sector Equal Weighting – Instead of being concentrated in the largest companies, these ETFs allocate equally across sectors. This structure may help reduce reliance on any single sector’s performance.
- Diversification Within Sectors – In addition to equal-weighting sectors, these ETFs distribute exposure more evenly across companies within each sector. This results in a portfolio where individual stocks have a more balanced influence.
- Potential Impact on Volatility – By reducing concentration in specific high-volatility sectors or individual stocks, this approach may lead to different performance dynamics compared to traditional market-cap-weighted strategies, particularly during periods of heightened market fluctuations.
- Exposure to a Broad Set of Market Trends – Rather than being driven by the largest companies, a stratified approach provides exposure across a wider range of industries and business models, which could impact portfolio behavior under different market conditions.
Considering Different Approaches to Market Volatility
No single strategy eliminates volatility, but different portfolio construction methods can lead to varying risk and return profiles. The sector-equal-weighted approach used by SSPY and SHUS presents an alternative to traditional cap-weighted indices, potentially affecting how investors experience market fluctuations.
For those considering different ways to approach portfolio diversification, examining alternative weighting methodologies may provide insight into how various strategies behave under different market conditions.
Market Volatility Got You Spinning?
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Investors should consider the investment objectives, risks, charges and expenses carefully before investing. For a prospectus or summary prospectus with this and other information about the Fund, please call (866) 972-4492 or visit our website at https://stratifiedfunds.com/investor-materials. Read the prospectus or summary prospectus carefully before investing.
The Funds are distributed by Foreside Fund Services, LLC. Exchange Traded Concepts, LLC serves as the investment advisor. Foreside Fund Services, LLC. is not affiliated with Exchange Traded Concepts, LLC or any of its affiliates.
Investing involves risk, including loss of principal. The Funds are subject to certain other risks, including but not limited to, equity securities risk, large-capitalization risk, index tracking risk, passive strategy/index risk, and market trading risk. Investing involves risk, including possible loss of principal. There can be no guarantee the Fund will meet its investment objectives.
SSPY Risks: The Fund is subject to certain other risks, including but not limited to, equity securities risk, large-capitalization risk, index tracking risk, passive strategy/index risk, and market trading risk. Investing involves risk, including possible loss of principal.
SHUS Risks: The Fund is actively managed using a proprietary process, and there can be no guarantee that the Fund's investment strategies will be successful. The Fund may invest in Underlying Funds or Securities that are managed with a passive investment strategy, attempting to track the performance of an unmanaged index of securities. This differs from an actively-managed fund, which typically seeks to outperform a benchmark index. Maintaining investments in securities regardless of their individual performance or market conditions could negatively affect the Fund's return. The Fund is subject to certain other risks, including but not limited to, equity securities risk, large-, mid-, and small-capitalization risk, and market trading risk. Investing in securities of small and mid-sized companies may involve greater volatility than investing in larger and more established companies. Certain investments may be subject to restrictions on resale, trade over-the-counter or in limited volume, or lack an active trading market. Purchased put options may expire worthless and may have imperfect correlation to the value of the Fund’s sector based investments. Written call and put options may limit the Fund’s participation in equity market gains and may amplify losses in market declines. The Fund’s losses are potentially large in a written put or call transaction. If unhedged, written calls expose the Fund to potentially unlimited losses. The Fund invests in derivatives. Derivatives are financial instruments that derive their performance from an underlying reference asset, such as an index. The return on a derivative instrument may not correlate with the return of its underlying reference asset. Derivatives can be volatile and may be less liquid than other securities.
Shares are bought and sold at market price (not NAV) and are not individually redeemed from the Fund. Investors may purchase or sell individual shares on an exchange on which they are listed. Market returns are based upon the midpoint of the bid/ask spread at 4:00 p.m. Eastern time (when NAV is normally determined for most ETFs), and do not represent the returns you would receive if you traded shares at other times. Please see the prospectus for more details.
The Syntax Stratified LargeCap Index™ is the property of Syntax, LLC, which has contracted with S&P Opco, LLC (a subsidiary of S&P Dow Jones Indices LLC) to calculate and maintain the Index. The Index is not sponsored by S&P Dow Jones Indices or its affiliates or its third-party licensors (collectively, “S&P Dow Jones Indices”). S&P Dow Jones Indices will not be liable for any errors or omissions in calculating the Index. “Calculated by S&P Dow Jones Indices” and the related stylized mark(s) are service marks of S&P Dow Jones Indices and have been licensed for use by Syntax, LLC, the parent company of Syntax Advisors, LLC. S&P® is a registered trademark of Standard & Poor’s Financial Services LLC (“SPFS”), and Dow Jones® is a registered trademark of Dow Jones Trademark Holdings LLC (“Dow Jones”).
The Syntax Stratified LargeCap Index™ is the property of Syntax, LLC, the Fund’s index provider. Syntax®, Stratified®, Stratified Indices®, Stratified Weight™, and FIS™ are trademarks or registered trademarks of Locus LP. Performance of an index is not illustrative of any particular investment. It is not possible to invest directly in an index.
Stratified Weight™ is the weighting methodology by which Syntax diversifies an index’s constituent companies that share “Related Business Risks.” Related Business Risk occurs when two or more companies provide similar products and/or services or share economic relationships such as having common suppliers, customers or competitors. The process of identifying, grouping, and diversifying holdings across Related Business Risk groups within an index is called stratification, and was designed by Syntax to seek to correct for business risk concentrations that regularly occur in capitalization-weighted indices and equal-weighted indices.
The Stratified Hedged Strategy combines the benefits of exposure to a Stratified Weight™ equity portfolio with a rules-based protection program managed by Exchange Traded Concepts to reduce the risk of losses due to market downturns.
Diversification does not ensure a profit or guarantee against a loss.
The S&P 500® Index is a market-capitalization-weighted index of the 500 leading publicly traded companies in the U.S.
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