The Covid-19 experience was like no other, and while humans are slowly crawling out of their foxholes and re-engaging with the world, many uncertainties remain about the pace of economic recovery, the potential emergence of Pandemic Part 2 and how the equity markets are accounting for all of this uncertainty.

But regardless of what’s in store for the markets, some investment strategists believe the pandemic has changed the investing game going forward by accelerating changes that were already afoot.

“I don’t know whether the market will keep going up, but I think about it differently in that this isn’t a market anymore,” says Matthew Tuttle, CEO and chief investment officer at Tuttle Tactical Management LLC. “I think what you’ve got is the haves and the have-nots. The haves are the companies benefiting from social distancing such as Amazon, Netflix and Zoom, and who will most likely benefit in a post-Covid world. The have-nots include airlines, banks, department stores and the like.”

Tuttle manages a variety of tactical strategies in separately managed accounts, most of which have been converted into four exchange-traded funds that debuted in May. His firm’s underlying trend aggregation model analyzes trends, countertrends and fundamental statistics to find uncorrelated return streams across different asset classes.

Tuttle posits that indexes were designed to track a pre-Covid economy and aren’t set up for the post-Covid world. So he approaches investing from the standpoint of the haves and the have-nots. “We want to make sure we have a lot of exposure to the haves,” he explains, adding that he still invests a smaller portion into the have-nots to capture their returns when they undergo a reversion to the mean.

The biggest equity holdings in the Trend Aggregation U.S. ETF (TAEQ), the largest of the firm’s four new products, recently included Coupa Software, a platform for business spend management; Roper Technologies, a maker of software and engineered products for various niche markets; and Nuance Communications, a software company focused on what it calls conversational artificial intelligence solutions.

On the flip side, United Airlines was one of the holdings meant to capture upside potential from mean reversion.

Zombies
Tim Fortier, founder and chief investment officer at Drawbridge Strategies, also believes that traditional equity indexes are out of touch with the post-Covid world. His take is that consumers’ behavioral habits are changing—that airlines, retail, lodging and restaurants are among the industries directly impacted by Covid and that they will have a hard time re-establishing their pre-Covid levels.

“Getting back to 80% or 90% of lost business isn’t fine,” Fortier says. “We’re comparing numbers now that the only comparisons for are the Great Depression.”

Fortier constructs algorithm-driven, ETF-based model portfolios that seek absolute returns by capitalizing on up markets while automatically defaulting to risk-off positions in down markets. He believes changes in consumer behavioral habits are damaging certain industries and potentially weighing down indexes with a lot of dead weight that could hamstring traditional passive investing.

“There’s a term being used about zombies in your index,” Fortier says, referring to a list put together by Toroso Investments that identified 25 so-called “zombie” industries it believes have been fundamentally harmed by Covid-related changes in work and consumption habits. The roster includes airlines, resorts and casinos, travel services and various real estate-related sectors, among others.

“For every dollar you’re allocating to a traditional passive index, you’re allocating it to some of these industries or companies that either may underperform or not exist in its present form,” Fortier says. “One of the challenges of a traditional allocation approach is controlling that exposure to those 25 or so industries that will be a drag on performance.”

Moving forward, his plan of attack is to rely on his models’ rule sets that automatically adapt the portfolios based on market conditions. “I’ve coined the term ‘adaptive allocation,’ which I think is a pretty good description of what we do,” Fortier says.

He also posits that direct indexing is a way to avoid some of the potential performance drags caused by zombie industries. This method entails buying fractional shares of the companies you want in a certain index. “If you create these custom universes, you can apply this framework to the slivers of the market that I think represent the post-Covid market,” Fortier says.

Slivers, or sectors that fit that bill include artificial intelligence, cloud storage, cutting-edge health care and online payment-processing sectors. Fortier says certain ETFs tap into these trends, such as the Ark Genomic Revolution ETF (ARKG) and the WisdomTree Cloud Computing Fund (WCLD). He also cited ETFs tied to the online gaming business, as well as the ProShares Long Online/Short Stores ETF, which was up 39% this year through June 9.

“That speaks to the evolution of the ETF industry because it’s getting more innovative and that provides more tools in the investor toolbox,” Fortier says.

Don’t Be Complacent
Dan Weiskopf wears a couple of hats when it comes to investing: One involves his role as portfolio manager at ETF specialist Toroso Investments. The other entails his role as research strategist at the ETF Think Tank, which consists of roughly 600 members who share ideas about ETF investing, and whose participants range from large asset managers to solo registered investment advisors.

He notes the group in May held a conference call where they discussed some ETFs that seem well-suited for future trends. One was the ROBO Global Healthcare Technology and Innovation ETF (HTEC).

“It’s on the smaller side, but it’s interesting because it’s targeted at robotics and AI and the digitization of health care,” Weiskopf says. “We know we have to focus on health care on a global level, and this ETF captures that trend.”

He also spotlighted the SoFi Gig Economy ETF (GIGE), which Toroso Investments is the advisor on.

“When I look at the post-coronavirus environment, I’m looking at where I’m going to find the most innovation or maybe the most alpha,” Weiskopf notes. “And that sometimes comes from different access points.”

He suggests that investors take a barbell approach that aims to provide some portfolio protection via long positions in products that could go up when the market goes down. He believes a fund that fits that bill is the AGFiQ US Market Neutral Anti-Beta Fund (BTAL).

“That goes up when the market goes down because of its short/high beta and long/low beta,” Weiskopf says. “The fund uses no leverage, and it’s working with a defined factor—beta.”

On the fixed-income side, one product he likes is the Saba Closed-End Funds ETF (CEFS). One thing that makes it different, he says, is that it employs activism in the closed-end fund space.

“You’re getting a roughly 10% discount on the holdings and roughly a 10% yield, and you have events taking place where activism can narrow some of that discount,” he explains. “Hopefully, that will produce 2% to 3% in capital appreciation on top of the yield.”

Weiskopf offers that there are two types of advisors: Those who are complacent and just glad their portfolios got back to even when equities rebounded from the March 23 lows, and those who are sitting on a lot of cash and are more tactical.

“I think the complacent advisor will be in a lot of trouble going forward because I think the market has changed,” he says. “That’s part of the reason why we’ve seen an increase in our [ETF Think Tank] membership—advisors are trying to figure out what to do because the strategic allocation process may not work in the same way it has during the past 10 years.”