Drawdowns, Volatility & The Market Timing Myth


Q2 2021 Edition


25th June | 7 mins

Key takeaways

  • Time in the market not market timing
  • Megatrends likely evolve independently of macroeconomic and market cycles
  • We believe there’s no substitute to identifying long-term megatrends and maintaining conviction in their ability to shape our future
The Emotional Rollercoaster of Volatility 

Increased volatility tends to come with the territory for rapid growth businesses; potentially exposed to negative events such as cyclical challenges or exogenous shocks. Thematic investing may diversify away some of this volatility. However, even a broad basket of stocks tied to rapid growth names (or a long-time horizon) can be equally volatile as the market.

2021 has been no different as we have already seen significant corrections across some themes. This has been amid a backdrop of broader markets like the S&P 500 continuing to advance. This is not entirely surprising to us given thematic investing typically relies on identifying and understanding structural megatrends that will likely evolve independently of macroeconomic and market cycles. Thus as volatility (of the downside variety) comes and goes, we continue to ask investors to leverage the four quadrant matrix, focusing on, among other things, sales growth.

"When it comes to so-called market timing there are only two sorts of people: those who can’t do it, and those who know they can’t do it."
                                                                               - Terry Smith -


Apples to Apples: Drawndown & Loss

Further, as most of our investors know, drawdown is a measure of downside volatility that measures an equity’s peak-to-trough decline. Drawdown and loss are not necessarily the same thing. With this in mind our research team have taken a deep dive into the realized average historical forward performance following a variety of sizeable declines (10, 20 & 30%) of these thematic indices:

• Dow Jones Internet Comp Index (Internet)
• Nasdaq CTA Cybersecurity Index (Cybersecurity)
• ISE CTA Cloud Computing Index (Cloud Computing)
• NASDAQ® Clean Edge® Green Energy Index (Clean Energy)

Proof is in the Pudding

• On average, following a 10%, 20% or 30% drawdown all four indices tended to produce above average returns across 3, 12 and 36 month time horizons. 1

• The magnitude of this realized future outperformance tended, on the whole, to increase following a larger drawdown, but also appears more volatile as the drawdown deepens.

• Following a 10% drawdown, the subsequent three months usually saw the highest pick up in performance. On the flip side, after 20% and 30% drawdowns forward performance seems to wait longer with the next 12 months demonstrating the largest uptick in performance.

1 Except with Nasdaq CTA Cybersecurity index which has never experienced a 30% drawdown.




Source: Internal analysis by First Trust, Dow Jones Internet Composite Index, time period 31st Jan 2006 - 26th Feb 2021, Inception 18th Feb 1999, Nasdaq CTA Cybersecurity Index, time period 30th June 2015 - 26th Feb 2021, Inception 23rd June 2015, ISE CTA Cloud Computing Index, time period 31st Dec 2007 - 26th Feb 2021, Inception 31st Dec 2007, NASDAQ Clean Edge Green Energy Index, time period 30th Nov 2006 - 26th Feb 2021, Inception 17th Nov 2006. Past performance is no guarantee of future results. Please see disclaimer for definitions. The analysis presented is of past performance of specific indices within specific time frames that is unlikely to occur in the future. The performance shown does not take into effect taxes, commissions and other trading costs. No investor received the returns shown. Investors cannot invest directly in an index.

Time is on your side

Ultimately, we believe there’s no substitute to identifying long-term megatrends and maintaining conviction in their ability to shape our future.

Sales Growth 

As highlighted above, we continue to ask investors to focus on sales growth as an important measure of profitability. Here are the P/S ratio and weighted sales growth numbers for our thematic ETFs and benchmarks:


Source: FactSet, as at 17 June 2021.

“It's time in the market, not market timing that counts.”

- Christopher Browne - 

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