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Invest in These Hedge Volatility ETFs to Protect Your Portfolio
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Wall Street is currently playing a tug-of-war between bulls and bears. The wider spread of COVID-19 vaccines, a greater vaccination push, improving economic growth, an expanded stimulus and the resumption of corporate earnings growth have been powering the bulls. The latest batch of data also painted an upbeat picture of U.S. consumers.
Retail sales unexpectedly jumped in August as a pickup in purchases across most categories more than offset the weakness at auto dealers, showing resilient consumer demand for merchandise. Oil price also jumped on tightening supply conditions and an improving demand outlook. In fact, Wall Street is the most bullish on stocks in almost two decades with about 56% of all recommendations on S&P 500 firms listed as buys, the highest since 2002 (read: Energy ETFs: A Bright Spot Amid Volatility).
On the other hand, a resurgence in COVID-19 infection has raised worries over the reopening of the economy, thereby charging the bears. The United States is now averaging nearly 136,000 new COVID-19 cases over the last seven days and vaccination rates have slowed down since April. Possible increases to the U.S. corporate tax, a slowdown in China and signs of higher inflation are also making investors jittery. U.S. producer prices rose 0.7% and 8.3% year over year in August, leading to the biggest annual gain in nearly 11 years and indicating that high inflation was likely to persist as the pandemic put pressure on supply chains.
In such a scenario, investors should apply some hedging techniques to their equity portfolio. While there are a 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.
HUSV is an actively managed ETF providing exposure to 75 domestic stocks that seem to exhibit low volatility ahead. Information technology, consumer staples, industrials and healthcare are the top four sectors accounting for a double-digit allocation each. It has amassed $120.8 million in its asset base but sees a lower average daily volume of 7,000 shares. Expense ratio comes in at 0.70%.
Innovator Laddered Fund of U.S. Equity Power Buffer ETF (BUFF - Free Report)
This fund tracks the Refinitiv Laddered Power Buffer Strategy Index, which comprises an equal-weight allocation to each of the 12 Innovator U.S. Equity Power Buffer ETFs which provide the upside of U.S. equities, subject to caps, while buffering against the first 15% of U.S. equity losses. With AUM of $63.1 million, it charges investors 99 bps in annual fees and trades in an average daily volume of 14,000 shares.
DeltaShares S&P 500 Managed Risk ETF
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 $423 million in its asset base and trades in light volume of 5,000 shares. It charges 35 bps in fees per year.
This actively managed fund seeks to deliver positive returns in rising or falling markets that are not directly correlated 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 $232.5 million in its asset base and charges 40 bps in fees per year from investors. Volume is light, exchanging 71,000 shares a day on average (read: Growth Concerns to Drive Demand for Low-Volatility ETFs).
This ETF seeks capital appreciation with a focus on managing drawdown risk through hedges. The strategy typically selects 50-75 large U.S. companies based on a Yield plus Growth framework, filtering candidates on dividend yield, growth outlook, valuation ande price momentum. It has an added objective of capital protection through the use of equity and index options to reduce drawdown when U.S. equity markets are falling. The fund charges 79 bps in annual fees and has accumulated $270.4 million in its asset base. It trades in an average daily volume of 40,000 shares.
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.
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Invest in These Hedge Volatility ETFs to Protect Your Portfolio
Wall Street is currently playing a tug-of-war between bulls and bears. The wider spread of COVID-19 vaccines, a greater vaccination push, improving economic growth, an expanded stimulus and the resumption of corporate earnings growth have been powering the bulls. The latest batch of data also painted an upbeat picture of U.S. consumers.
Retail sales unexpectedly jumped in August as a pickup in purchases across most categories more than offset the weakness at auto dealers, showing resilient consumer demand for merchandise. Oil price also jumped on tightening supply conditions and an improving demand outlook. In fact, Wall Street is the most bullish on stocks in almost two decades with about 56% of all recommendations on S&P 500 firms listed as buys, the highest since 2002 (read: Energy ETFs: A Bright Spot Amid Volatility).
On the other hand, a resurgence in COVID-19 infection has raised worries over the reopening of the economy, thereby charging the bears. The United States is now averaging nearly 136,000 new COVID-19 cases over the last seven days and vaccination rates have slowed down since April. Possible increases to the U.S. corporate tax, a slowdown in China and signs of higher inflation are also making investors jittery. U.S. producer prices rose 0.7% and 8.3% year over year in August, leading to the biggest annual gain in nearly 11 years and indicating that high inflation was likely to persist as the pandemic put pressure on supply chains.
In such a scenario, investors should apply some hedging techniques to their equity portfolio. While there are a 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
First Trust Horizon Managed Volatility Domestic ETF (HUSV - Free Report)
HUSV is an actively managed ETF providing exposure to 75 domestic stocks that seem to exhibit low volatility ahead. Information technology, consumer staples, industrials and healthcare are the top four sectors accounting for a double-digit allocation each. It has amassed $120.8 million in its asset base but sees a lower average daily volume of 7,000 shares. Expense ratio comes in at 0.70%.
Innovator Laddered Fund of U.S. Equity Power Buffer ETF (BUFF - Free Report)
This fund tracks the Refinitiv Laddered Power Buffer Strategy Index, which comprises an equal-weight allocation to each of the 12 Innovator U.S. Equity Power Buffer ETFs which provide the upside of U.S. equities, subject to caps, while buffering against the first 15% of U.S. equity losses. With AUM of $63.1 million, it charges investors 99 bps in annual fees and trades in an average daily volume of 14,000 shares.
DeltaShares S&P 500 Managed Risk ETF
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 $423 million in its asset base and trades in light volume of 5,000 shares. It charges 35 bps in fees per year.
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 not directly correlated 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 $232.5 million in its asset base and charges 40 bps in fees per year from investors. Volume is light, exchanging 71,000 shares a day on average (read: Growth Concerns to Drive Demand for Low-Volatility ETFs).
Aptus Drawdown Managed Equity ETF (ADME - Free Report)
This ETF seeks capital appreciation with a focus on managing drawdown risk through hedges. The strategy typically selects 50-75 large U.S. companies based on a Yield plus Growth framework, filtering candidates on dividend yield, growth outlook, valuation ande price momentum. It has an added objective of capital protection through the use of equity and index options to reduce drawdown when U.S. equity markets are falling. The fund charges 79 bps in annual fees and has accumulated $270.4 million in its asset base. It trades in an average daily volume of 40,000 shares.
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.