How To Hedge Your Portfolio With ETFs Amid Rising Volatility

Volatility has taken precedence this month, triggered by fresh escalation in U.S.-Sino trade war. This is because President Donald Trump unexpectedly threatened to impose a new tariff of 10% on the remaining $300 billion of Chinese goods effective Sep 1. Meanwhile, China retaliated by allowing the yuan to slip to the lowest level against the dollar in more than a decade, sparking currency war concerns. Per Bloomberg News, China has halted imports of U.S. agricultural products.

Additionally, less-than-expected Fed’s dovish view added to the woes. Though the central bank lowered interest rates for the first time in more than a decade, it dampened hopes of a string of rate cuts to shore up the economy. Further, a slew of downbeat economic data also resulted in decline in the market. The U.S. ISM manufacturing index dropped for the fourth straight month in July to record the lowest reading since August 2016. U.S. Non-manufacturing (services) index also dropped last month.

However, the trade fear eased after People’s Bank of China (PBOC) jumped in to stabilize its currency on Aug 8. It set the official midpoint reference for the yuan at 7.0039 per dollar. Though it is the weakest point for the currency against the dollar since Apr 21, 2008, it is ahead of analyst expectation of 7.0222 per dollar per Reuters. The central bank fixed the midpoint of the currency rate below 7 yuan per dollar for the second time today at 7.0136 per dollar - the weakest level since Apr 3, 2008.

Yet again, volatility rose following fresh round of news, including the possibility of snap elections in Italy. Per Bloomberg, the White House is holding off on licensing decisions for American companies to restart business with Huawei Technologies. Additionally, bouts of latest data across the globe also added to the chaos. United Kingdom’s economy shrank for the first time in more than six years in the second quarter and producer-price index in Asian country contracted for the first time in nearly three years.

Amid such volatility, investors should apply some hedging techniques to their equity portfolio. While there are number of ways to do this, we have highlighted five volatility-hedged ETFs that could prove beneficial amid market uncertainty. Investors should note that these funds have the potential to stand out and outperform the simple vanilla funds in case of rising volatility.

How to Play

DeltaShares S&P 500 Managed Risk ETF (DMRL - Free Report)

This ETF seeks to track the S&P 500 Managed Risk 2.0 Index, which is designed to simulate a downside-protected portfolio by utilizing a framework that includes targeted volatility and a synthetic option overlay to hedge the downside risk of the portfolio. DMRL has accumulated nearly $413.3 million in its asset base and trades in light volume of 5,000 shares. It charges 35 bps in fees per year.  

Innovator S&P 500 Power Buffer ETF (POCT - Free Report)

This is an actively ETF and seeks to track the return of the S&P 500 Price Return Index, up to a predetermined cap, while buffering investors against the first 15% of losses over the outcome period. It has amassed $221 million in its asset base and trades in average daily volume of 87,000 shares. POCT charges 79 bps from investors in annual fees and expenses.

Nationwide Risk-Based U.S. Equity ETF (RBUS - Free Report)

This ETF follows the R Risk-Based US Index and employs a risk-based strategy that seeks to provide upside potential while protecting against losses stemming from volatility. It holds well-diversified 250 stocks in its basket, with none of the securities accounting for more than 2.4% share. RBUS has accumulated $112.6 million in its asset base. It charges 30 bps in annual fees and trades in thin volume of 9,000 shares a day on average.

Invesco S&P 500 Downside Hedged ETF (PHDG - Free Report)

This actively managed fund seeks to deliver positive returns in rising or falling markets that are uncorrelated to broad equity or fixed-income market returns. It tries to follow the S&P 500 Dynamic VEQTOR Index, which provides broad equity market exposure with an implied volatility hedge by dynamically allocating between different asset classes: equity, volatility and cash. The S&P 500 Total Return Index represents the equity component while the S&P 500 VIX Short-Term Futures Index represents the volatility component of the index. The non-equity (volatility + cash) portion makes up for one-fourth of the portfolio while the rest goes to equity. The fund has accumulated $23.3 million in its asset base and charges 39 bps in fees per year from investors. Volume is light, exchanging 8,000 shares a day on average.

Cambria Value and Momentum ETF (VAMO - Free Report)

This is an actively managed ETF providing exposure to a portfolio of companies that offer strong characteristics by focusing on all three factors — value, momentum, and tactical hedging — with the added benefit of lower volatility and protection from market downturns. It results in a basket of 99 securities, with none holding more than 3% of the assets. The fund has accumulated $16 million in its asset base while trading in average daily volume of 7,000 shares. Expense ratio comes in at 0.59%.

Bottom Line

Investors can definitely shield their portfolio against volatility with the help of the above-mentioned products. These provide dynamic exposure according to the level of market volatility and are least affected by any market turmoil. So, they could prove to be great choices when it comes to offering protection against market downturn.

Disclosure: contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any specific ...

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