How You Could Have Avoided Last Year’s Correction

Last year finally broke the nine-year bull run in equity markets.

That length has been matched only twice since the 1950s. And most of this bull run was accompanied by extraordinarily low volatility for equities. In 2017, the Chicago Board Options Exchange’s (Cboe’s) VIX Index—a measure of the market’s expectation for forward volatility—traded at close to 10, which is about half of its long-term average of 20.

And then the end of 2018 happened.

I previously have written about indicators WisdomTree tracks that saw the writing on the wall.

Below, I cover what measures could have been taken to help avoid the downturn in equity markets that we saw in the fourth quarter of 2018.

Strategies That Worked

The WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW) and the WisdomTree CBOE Russell 2000 PutWrite Strategy Fund (RPUT) track the Cboe S&P 500 PutWrite Index (PUT) and the Cboe Russell 2000 PutWrite Index (RPUT), respectively.

The underlying indexes of the two strategies have an established track record of handling stress and potentially reducing significant risk in your portfolio.

Let’s see how they performed last year.

Out of a total 63 trading days in the fourth quarter of 2018, the S&P 500 Index had 38 negative trading days, while the Russell 2000 Index had 39. A true test of any volatility-reducing strategy lies in its relative performance on negative days. The table below compares PUT and PUTR performance relative to their benchmarks.

S&P Negative vs Positive

Russel 2000 Negative vs Positive

My quick takeaways:

  • PUT outperformed the S&P 500 on 34 of 38 negative days.
  • On average, it delivered a downside protection of ~24 basis points (bps) on each of those down days.
  • Similarly, PUTR outperformed the Russell 2000 on 35 of 39 negative days, and it did so with an average downside protection of ~31 bps per day.

A Deeper Look

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Disclaimer: Investors should carefully consider the investment objectives, risks, charges and expenses of the Funds before investing. U.S. investors only: To obtain a prospectus containing this ...

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