How do you know if your investment strategy is sound? It can still work amid economic uncertainty and market volatility.
That's the suggestion of Michelle Connell, founder and chief investment officer of Portia Capital Management, a Texas-based advisory firm. She bases that idea on more than 20 years of experience as an institutional investor, tech-sector analyst and venture capitalist.
Connell and her firm are well-suited to handle many different market environments with one key overarching theme and investment strategy. It's not just about going for return. It's about containing losses, too. As she recently told Investor's Business Daily, "As the firm's largest clients include foundations and charities, the mitigation of downside risk is essential."
For Connell, risk control is especially important in today's environment given what's coming later this year. "Election years, especially those that can be contentious, add uncertainty and volatility to the investment markets," she said.
There are different ways to hedge clients against downside risk.
Many advisors use a traditional investment strategy to tamp down risk. That might be investing in low-volatility or defensive stocks. Connell sees additional opportunities, though. She likes to take advantage of volatility by focusing on strategies that generate high yields based on volatility.
"The income streams of covered-call strategies should do well this fall," she said. And her favorite ETFs show how to put her investment strategy to work.
Using High-Yield Investment Strategy To Hedge Tech Exposure
Tech stocks have been unquestioned market leaders over the past year and a half. Many of the Magnificent Seven stocks are leading.
With the AI revolution still developing, Connell sees additional opportunities in the tech sector. But she likes the relatively more conservative JPMorgan Nasdaq Equity Premium Income ETF. It's an option for its ability to generate high yield on lower overall market risk.
Connell explains that JEPQ is "an active ETF that provides heavy exposure to tech and semiconductor giants, including Nvidia and Broadcom, while at the same time generating income from a covered-call strategy."
Due to the heightened volatility of these names, the ETF pays a hefty 8.76% dividend yield. The fund's approach uses data science techniques. It constructs a portfolio that maximizes expected future financial performance. But it also controls for key risks and aligns nicely with her firm's overall investment strategy goals.
"The lead portfolio manager at JPMorgan, Hamilton Reiner, designed this to lower downside risk when market corrections occur," Connell said. "But it should be noted that covered-call strategies also mute upside."
Investment Strategy Can Also Mitigate Downside Risk
Connell's belief in the combined high-yield and risk-reduction strategy extends beyond just the tech sector. Dividend stocks can also make for an ideal core position within a covered-call investment strategy.
While they don't often generate the higher yields that funds such as JEPQ do, the focus on durable and defensive stocks during high-volatility environments can be especially useful for those seeking principal protection. For this purpose, she likes the Amplify CWP Enhanced Dividend Income ETF.
Connell explains that "DIVO is a covered-call strategy focusing on large-cap stocks across all major industries, and it has a five-star Morningstar rating. Covered calls strategies are known to protect portfolios when there are corrections."
The fund tends to be more concentrated around the manager's highest-conviction names. But Connell also likes the flexibility that active management can provide for shareholders and their investment strategy. "Its active management allows it to pivot, protect against risk and take opportunities when they arise. She also notes the attractiveness of DIVO's current 4.58% dividend yield.
Focusing On The Tech Giants
While risk mitigation is central to Connell's core investment strategy, so is long-term growth of capital. That would lead many investors to tech and the Magnificent Seven, but she prefers something that's a little more well-rounded, which is why she likes the Vanguard Mega-Cap Growth ETF.
"While it is tech-heavy and includes winners such as Microsoft, Nvidia and Amazon.com, it also provides exposure to the consumer, health care and communication services industries. With a fee of only .07%, MGK is a cheap way to add megacap growth to your portfolio."
She acknowledges that there are risks in investing in an area of the market that has experienced such a strong rally (this fund returned 52% in 2023), but there's still some potential upside if you're willing to be diligent. She explains, "On a pullback, this might be a good way to play the growth side of your portfolio."
