5 ETFs To Protect Your Portfolio From Downside Risk
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As markets navigate the typical end-of-summer lull, investors are increasingly exploring diversified strategies that help to protect their portfolios from downside risk.
In such a scenario, low-risk ETFs like ProShares VIX Short-Term Futures ETF (VIXY - Free Report), Simplify Tail Risk Strategy ETF (CYA - Free Report), Noble Absolute Return ETF (NOPE - Free Report), Cambria Tail Risk ETF (TAIL - Free Report) and AGFiQ US Market Neutral Anti-Beta Fund (BTAL - Free Report) could be compelling choices. These ETFs are designed for investors who prioritize capital preservation over high returns.
Weak Market Trends
Wall Street has lost momentum since the start of August, triggered by the series of bank downgrades and fears of higher rates for longer than expected period. Notably, the S&P 500 has declined more than 3% so far this month, threatening to break its months-long winning streak if the current slump continues.
A raft of strong economic data kept alive fears of higher interest rates for a longer period. U.S. retail sales came in better than expected, rising 0.7% in July. Additionally, inflation rose for the first time in July after 12 straight months of decline. The Consumer Price Index rose 3.2% year over year, from an increase of 3% in June, which was the lowest in over two years. Although inflation has dropped from a peak of 9.1%, it is still significantly above the Federal Reserve's 2% target.
Fed officials have taken a hawkish stance in recent weeks. In an interview with Yahoo Finance's Jennifer Schonberger, Boston Federal Reserve Bank President Susan Collins indicated it is "extremely likely" the Fed will need to hold interest rates higher for longer than initially anticipated to keep inflation on its downward trajectory.
Further, a spike in yields made investors jittery. After hitting a trough of 3.6% in April, the yield on the 10-year Treasury note hit a 16-year high of more than 4.3%, driven by expectations of higher-then-expected longer rates. The 2-year Treasury yield rose to above 5%.
Historically, August has been a challenging month for markets due to reduced trading volumes. Data from CNBC Pro reveals that the S&P 500 has seen a mere 0.1% increase in August over the past decade. In contrast, it experienced an average decline of 0.1% in August over the past two decades.
ETFs in Focus
ProShares VIX Short-Term Futures ETF (VIXY)
ProShares VIX Short-Term Futures ETF provides long exposure to the S&P 500 VIX Short-Term Futures Index, which measures the returns of a portfolio of monthly VIX futures contracts with a weighted average of one month to expiration.
ProShares VIX Short-Term Futures ETF has amassed $194.4 million in AUM and charges 85 bps in fees per year. It trades in an average daily volume of 3.9 million shares.
Simplify Tail Risk Strategy ETF (CYA)
Simplify Tail Risk Strategy ETF seeks to provide income and capital appreciation while protecting against significant downside risk to investors by hedging diversified portfolios against severe equity market sell-offs. The fund deploys advanced options strategies designed to handle multiple types of market dislocations.
Simplify Tail Risk Strategy ETF has amassed $22.7 million in its asset base and charges 84 bps in annual fees from investors. It trades in a volume of 60,000 shares a day on average.
Noble Absolute Return ETF (NOPE)
Noble Absolute Return ETF seeks capital appreciation across a full market cycle. It constructs a portfolio consisting of long positions in best securities with improving circumstances and short positions in best securities with deteriorating circumstances. It charges 1.82% in annual fees.
Noble Absolute Return ETF has gathered $13.4 million in its asset base and trades in an average daily volume of 34,000.
Cambria Tail Risk ETF (TAIL)
Cambria Tail Risk ETF seeks to mitigate significant downside market risk as it invests in a portfolio of "out of the money" put options purchased on the U.S. stock market. The TAIL strategy offers the potential advantage of buying more puts when volatility is low and fewer puts when volatility is high. While a portion of the fund's assets will be invested in the basket of long put option premiums, the majority of fund assets will be invested in intermediate-term U.S. Treasuries.
Cambria Tail Risk ETF has amassed $170 million in its asset base and charges 59 bps in annual fees from investors. It trades in a volume of 87,000 shares a day on average.
AGFiQ US Market Neutral Anti-Beta Fund (BTAL)
AGFiQ US Market Neutral Anti-Beta Fund has the potential to generate positive returns regardless of the direction of the stock market as long as low-beta stocks outperform high-beta stocks. It invests primarily in long positions in low-beta U.S. equities and short positions in high-beta U.S. equities on a dollar-neutral basis within sectors.
AGFiQ US Market Neutral Anti-Beta Fund has AUM of $234.8 million and an expense ratio of 1.54%. It trades in a volume of 363,000 shares a day on average.
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