Katie Stockton, Founder of Fairlead Strategies, spoke with NYSE (ICE) TV for a special video interview.
Watch the interview above and check out the transcript below. The transcript of this conversation has been lightly edited for length and clarity.
KRISTEN SCHOLER: I want to welcome our next guest. She is quite the lead when it comes to this particular industry and this year marks three years since her company Fairlead Strategies and its ETF was launched right here at the Exchange. So joining me now to discuss the anniversary as well as what to expect in this market is Katie Stockton, founder and managing partner at Fairlead Strategies. Katie, welcome.
KATIE STOCKTON: Thank you. It’s good to be here.
SCHOLER: Yes. Always great to have you at the stock exchange. Congratulations.
STOCKTON: Thank you. We’re excited. It’s a nice milestone to reach.
SCHOLER: For sure. It’s an incredible milestone. Three years in, where does TACK stand?
STOCKTON: So TACK has really proven to be a very good conservative way to invest in the market via the sectors and to do so with nice limited drawdown, sort of a lower beta, lower correlation to the S&P 500 as well. And in doing so, it’s really helped people manage risk and still participate on the upside. So, it’s been a great performer; we’re very proud of it.
SCHOLER: Talk to us about some of the holdings within this fund that could be good options for some of our viewers, especially in this environment.
STOCKTON: So what TACK does, it uses sector rotation as its primary strategy and what’s great about the ETF wrapper around that kind of strategy is it limits some of the tax implications of trading in and out of these sectors, Spider ETFs (STT) that we use. So we have a a wrapper around this strategy and by moving in and out of the sectors we can leverage their long-term momentum characteristics. We’re using month-end closing data to limit some of the noise of the market, of which there’s plenty of it of course, yes. And we also use asset allocation to limit drawdowns and that’s been very successful for us moving portions of the fund into short-term treasuries, long-term treasuries, and gold exposure. And that’s helped not only limit the drawdown but sort of manage through a diversified perspective of asset allocation.
SCHOLER: In this current market environment, Katie, how should our viewers think about considering TACK within their broader portfolio?
STOCKTON: I think of TACK as a very good core long-term holding. Something that ideally you don’t have to worry about a dynamic alternative to buy and hold really and also an alternative to the traditional 60-40 model. So wherever that fits in a portfolio, that’s where TACK can go. I like the idea of having TACK as a core and then building different exposure around it, sort of satellite positions perhaps when the market is very strong and higher beta stocks technology. TACK, by its nature, will have an underweight in technology because we’re equal weighting the sectors about 12.5% when we’re invested in them. So with that in mind, when the market’s on fire, we wanna make sure that we have that technology or growth exposure beefed up. Right now, of course, that’s not the case.
SCHOLER: Yeah. How would you describe the current state of the market?
STOCKTON: Volatility is obviously picked up as of Q1 here and I think that’s something that was signaled in Q4 if not even sooner than that in our momentum gauges. So the momentum has shifted, it’s not negative on a long-term basis, but it’s definitely gone from strong upside momentum to now something that’s more neutral at best. We have a lot of overbought downturns on the monthly charts as of March, really as of the end of March today. And that is something that suggests that this kind of trading range — this choppy action — could stay with the market really for the balance of the year.
SCHOLER: Interesting. So holistically, TACK is something that you recommend that our viewers take a look at over the next three years. What are your goals with this fund?
STOCKTON: The goal is to see it continue to do really what it’s already done, meaning that it’s built on sort of capital returns. We’re trying to post good returns for our investors of course, but to do so while eliminating that drawdown during riskier tapes like we have right now. Arguably now tech is really compelling in that we can have one sector, we can have eight sectors. So when we have one sector we’d have pretty sizable positions in the gold and the treasuries. And so at any given time it may hold that kind of level of risk off exposure. So it’s something that you can trust to do the work for you effectively.
SCHOLER: What are the biggest questions that you’re fielding from clients in this environment?
STOCKTON: I think how low can we go and is this a bear cycle or is it just a correction? That’s really the thing that’s on people’s minds right now. Emotions are running pretty high, so we are looking for some kind of relief rally for a better selling opportunity. But with the downdraft, as you could imagine, a lot of things are broken on their charts, meaning that the breakdowns would suggest that we have at least moved into a trading range environment at best. And we’ve seen a real shift out of technology and that’s been associated with this loss of momentum more broadly. So that’s something that’s meaningful, certainly relative to what we got accustomed to last year.
SCHOLER: Is there a timeline that you can see on the charts as to how long this might last?
STOCKTON: There is actually, and there’s no precision here, but our indicators do give a sense of timelines and for us we have about nine months assigned to this potentially higher volatility environment and this is an environment in which TACK should shine.
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