ETFs Designed to Weather Bull or Bear Markets

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Almost all stock-oriented mutual funds and ETFs are designed to capture the upside in markets, which makes them less desirable investments if stocks enter into a sustained downturn. 

Howard Capital Management has long understood the dangers of investments that lack downside risk management. For the past 21 years, the company has specialized in providing various investments that are nimble enough to capture market upside yet also limit losses when markets swoon. 

Last October, the company issued its first two ETFs: the HCM Defender 500 Index ETF (LGH), which tracks the Defender 500 Index (seeking to outperform the Solactive US Large Cap Index) and the Standard & Poor’s 500 index, and HCM Defender 100 Index ETF (QQH), which tracks the Defender 100 Index (seeking to outperform the Solactive US Technology 100 index) and the Nasdaq 100. The ETFs track proprietary indices that are guided by Howard Capital’s quantitative investment model, the HCM-BuyLine®. The model uses trend analysis to determine when the funds should be fully invested in equities and when exposure should be pared back.

Vance Howard, the CEO of Howard Capital Management, recently discussed how these funds can work for retail investors.

Vance Howard, CEO of Howard Capital Management

Why would financial advisors want to recommend one or both of these ETFs to their clients? 

Howard: I believe both of these ETFs are like your anchor tenants in a shopping mall. What they have is proprietary risk management, and they could be appropriate for many investment portfolios. Howard Capital Management was largely unaffected by the bear markets of 2000-2002 and 2008 because of the HCM-BuyLine®. Again, both ETFs are guided by our proprietary model. When a benchmark index dips below our mathematical model’s projections, the HCM-BuyLine® reduces exposure to equities by investing in one- to three-month U.S. Treasury Bills. The HCM-BuyLine® does the opposite – increases the stock position – when market conditions predict an upturn.

But will these ETFs avoid a short-term correction caused by a flash crash or a regular sell-off?    

Howard: These ETFs have the ability to pull you out before a nasty bear market, but they aren’t designed to sidestep a 10% correction. We feel those are normal market movements that occur roughly once a year. But when a major trend changes, the model seeks to make adjustments. It’s designed to catch 20% to 40% drops. One of the things we have improved on with the model, though, is how fast we come back into the market when the market turns back up. 

What do you say to advisors who argue that this approach to investing is a case of market timing? Warren Buffett, for example, is famously dismissive of investors who try to time markets by shifting in and out of cash. 

Howard: I don’t consider us market timers because the model doesn’t trigger a sell that often. It’s not that active an indicator, but when it does signal a change, we pay attention. Besides, Warren Buffett says he’s not a market timer, but I believe he’s one of the biggest market timers in the world. In 2008, he and his [Berkshire Hathaway] partner, Charlie Munger, were sitting on $35 billion in cash because they couldn’t find value. 

How tax-efficient are these ETFs? 

Howard: We didn’t design them to be tax-efficient. If we have to go heavily to cash, there will be capital gains that are realized, and that will be a taxable event.  

Does Howard Capital plan to come out with other ETFs that offer risk management but are benchmarked to other assets? 

Howard: We are currently exploring a bond ETF that can move to cash. One thing that many investors have never seen is a bear market in bonds. And we believe the HCM-Buyline® could work just as well identifying the major turns in the bond market. We’ve had very low interest rates now for a while, and we haven’t seen them go up to 4% or more. When that happens, the value of those bonds could drop dramatically, and we want to put our investors in a position to potentially mitigate some of that downside loss in bonds. We may launch it in the middle of 2021. 

Investors should carefully consider the investment objectives, risks, charges, and expenses of the HCM Funds. This and other important information about the Funds are contained in the prospectus, which can be obtained at or by calling 770‐642‐4902. The prospectus should be read carefully before investing. HCM Funds are distributed by Northern Lights Distributors, LLC, member FINRA/SIPC. Northern Lights Distributors, LLC, and Howard Capital Management, Inc., are not affiliated.

Important Risk Information:

Exchange-Traded Funds involve risk, including possible loss of principal. Equity securities may fluctuate in value in response to the activities of individual companies and general market and economic conditions. While the shares of ETFs are tradable on secondary markets, they may not readily trade in all market conditions and may trade at significant discounts in periods of market stress. ETFs trade like stocks, are subject to investment risk, fluctuate in market value, and may trade at prices above or below the ETF’s net asset value. Brokerage commissions and ETF expenses will reduce returns. There is no guarantee that the Fund will achieve its objective. Securities in the Index or in the Fund’s portfolio may underperform in comparison to the general securities markets or other asset classes.

The HCM-BuyLine® (the “Indicator”) is a proprietary indicator used to assist in determining when to buy and sell securities. Not every signal generated by the Indicator will result in a profitable trade. There will be times when following the Indicator will result in a loss. An important goal of the Indicator is to outperform the market on a long-term basis. The Indicator is reactive in nature, not proactive. They are not designed to catch the first 5% to 10% of a bull or bear market. Ideally, they will avoid most of the downtrends and catch the bulk of the uptrends. Naturally, there can be no guarantee that the Indicator will perform as anticipated. Use of the Indicator will not necessarily limit your losses to the desired amounts due to the limitations of the Indicator, market conditions, and delays in executing orders.

3368-NLD-3/30/2020 HCM-033020-ETF8

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