U.S. Election Years Are Volatile. Here’s Where the Smart Money Goes.

Apr. 22, 2024

America will decide on its next President on November 5, and history shows that there will likely be heightened volatility between now and then, with average VIX index readings typically elevated during election years compared to non-election ones. As a result, many investors have tended to be more cautious, substantially ramping fund flows into low-risk holdings such as money market and ultra-short-term bond exposures.

ETFs in Focus

Exposure Benefits

  • Preserve capital during bouts of heightened volatility
  • Invest in high-quality money market instruments and fixed income securities
  • Enhance yield profile through low-duration corporate bonds 

Trade Idea

Implied volatility levels are low right now, according to the VIX Index, while tight credit spreads similarly indicate a mostly sanguine outlook in markets. However, volatility can quicky move to the upside, and there is a clear pattern that it does during U.S. presidential election years. As indicated in the chart below, forecasted volatility is up compared to previous election cycles, with the market anticipating a peak between September and October. 

September-October VIX Futures Spread

September-October VIX Futures Spread
Source: TD Cowen Equity Derivatives, March 292024.

Based on historical trends, many investors will likely head for safe-haven assets, as they have done in past election years. The chart below illustrates the average increase in flows to money market funds compared to equity funds in a given presidential election year dating back to 1992, with flows into the former substantially higher compared to the year following an election. 

Average Net Fund Flows by Year of Presidential Terms (19922023)

Average Net Fund Flows by Year of Presidential Terms (1992-2023)
Sources: Capital Group, Morningstar. Values based on U.S. dollars (USD). Funds include mutual funds at ETFs. Equity funds include funds within Morningstar’s International Equity and U.S. Equity categories. Money market funds include funds within Morningstar’s Money Market category. As of December 312023.

BMO ETFs provides options for investors seeking stability while maintaining liquidity and yield generation. 

Preservation of Capital 

For capital preservation, the BMO Money Market Fund ETF Series (Ticker: ZMMK) invests in high-quality money market instruments and fixed income securities issued by governments and corporations in Canada. The BMO USD Cash Management ETF (Ticker: ZUCM)1 provides unhedged exposure to U.S. T-Bills (and U.S. currency) providing a high level of liquidity and capital preservation for investors. The ETF is also available in a USD format, under the ticker ZUCM.U.

Cash-Plus Solution

For investors looking for a bump in yield while maintaining a similar risk profile, the BMO Ultra Short-Term Bond ETF (Ticker: ZST) provides defensive income by investing in a diversified portfolio of corporate bonds with a maturity of less than one year. For U.S. exposure to the same asset class, investors should consider the BMO Ultra Short-Term US Bond ETF – USD Units (Ticker: ZUS.U)1.

Bonds held within ZST/ZUS.U are also trading at a discount as a result of steep interest rate increases. As those bonds mature back to par value, this can generate returns in the form capital gains, allowing for some capital gain tax treatment rather than solely interest income.

The 2024 U.S. presidential election is expected to be a hotly contested one, with market expectations already pointing to a high likelihood of heightened volatility. The historical record also indicates that election years tend to see strong inflows of capital into short-term fixed income. It is reasonable to expect the trend to play out once again and for investors to position their portfolios accordingly. 

1 Changes in rates of exchange may also reduce the value of your investment. 

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