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The U.S. stock market is shaping up for the worst year in decades due to increased fears that the economy will plunge into a recession. This is especially true against the backdrop of persistent rising inflation and tightening monetary policies. Russia’s invasion of Ukraine and its impact on the global economy has also been weighing on investors’ sentiment.
In such a scenario, investors continue to look for the best possible ways to protect their portfolios from the potential downside while still investing in growing equities. One such great strategy in the space is long/short, which offers ways to seek profits and protection simultaneously (read: Did Safe Haven ETFs Protect Your Portfolio from Market Turmoil?).
The most popular ETFs in this space are S&P 500 Covered Call ETF (XYLD - Free Report) , First Trust Long/Short Equity ETF (FTLS - Free Report) , ProShares Large Cap Core Plus (CSM - Free Report) , AGFiQ US Market Neutral Anti-Beta Fund (BTAL - Free Report) and Leatherback Long/Short Alternative Yield ETF (LBAY - Free Report) .
What Are Long/Short ETFs?
The long/short ETFs take the best of both bull and bear prediction by involving buying and short selling of equities at the same time. This strategy is primarily used by hedge funds and involves taking long positions (buy) in stocks that are expected to increase in value while short positions (short sell) in stocks that are expected to decrease in value.
This unique investment vehicle utilizes leverage, derivatives, futures or index options in order to maximize total returns irrespective of market conditions as well as hedge out the market risk in case of elevated risk. Despite the high level of due diligence, the strategy often comes with low fees, reduced risks and no lock-in period. These are extremely flexible and provide high levels of diversification benefits. The long/short strategy is highly uncorrelated to the traditional asset classes (see: all the Long/Short ETFs here).
The long/short include various types of strategies such as market neutral, hedging, option-writing, and 130/30 strategies (130% exposure to long positions and 30% exposure to short positions). While there are a number of ETFs in this space that could ride out ups and downs of the market scenario, we have highlighted five products that could be compelling choices to play the current trends:
Market Trends
While the tech sector is bearing most of the brunt, energy is outperforming on rising oil prices. Oil resumed its strength in recent weeks due to supply disruptions and unprecedented demand. The geopolitical tensions between Russia and Ukraine and in the Middle East heightened concerns over tight energy supply amid increasing demand.
The sell-off aggravated when the Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest interest-rate increase since 1994 — and signaled continued tightening ahead, which could further weigh on stocks. Fed Chair Jerome Powell said another hike of 50 or 75 bps at the next meeting in July is likely.
The S&P 500 is now down 21% so far this year. If the year ends with this loss, the S&P 500 would register its worst annual decline since 2008 and its second-worst annual decline since 1974. On a total return basis, the index lost 37% in 2008 and 26.5% in 1974.
S&P 500 Covered Call ETF seeks to generate income through covered call writing, which historically produces higher yields in periods of volatility. It follows a “covered call” or “buy-write” strategy, in which the fund buys the stocks in the S&P 500 Index and “writes” or “sells” corresponding call options on the same index by tracking the Cboe S&P 500 BuyWrite Index (read: Which Stocks & ETFs Do Best When Inflation Spikes?).
S&P 500 Covered Call ETF has $1.6 billion in AUM and an expense ratio of 0.60%. It trades in an average daily volume of 586,000 shares.
First Trust Long/Short Equity ETF is actively managed and intends to pursue its investment objective by establishing long and short positions in a portfolio of equity securities. The overall portfolio, under normal market conditions, will be 80 to 100% invested in long positions and 0% to 50% invested in short positions.
First Trust Long/Short Equity ETF has amassed $462.1 million in its asset base while charges 1.36% in annual fees. It trades in an average daily volume of 62,000 shares.
ProShares Large Cap Core Plus tracks the Credit Suisse 130/30 Large Cap Index, which provides long/short positions in some of the largest 500 companies by applying a rules-based ranking and weighting methodology. It optimizes the portfolio, using the scores to overweight stocks with the most favorable outlooks and underweight or take short positions in stocks with less-favorable prospects.
ProShares Large Cap Core Plus has AUM of $411.8 million and an expense ratio of 0.45%. It trades in volume of 26,000 shares a day on average.
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 (read: 5 Safe ETFs to Play Amid Recession Fears).
AGFiQ US Market Neutral Anti-Beta Fund has AUM of $175.4 million and an expense ratio of 2.53%. It trades in an average daily volume of 209,000 shares.
Leatherback Long/Short Alternative Yield ETF (LBAY - Free Report)
Leatherback Long/Short Alternative Yield ETF is an actively managed exchange-traded fund that seeks income generation and capital appreciation through shareholder-yielding equities and income-producing securities. Leatherback establishes long positions in securities it believes will provide sustainable shareholder yield and takes short positions in securities it believes will decline in price.
Leatherback Long/Short Alternative Yield ETF has accumulated $51.2 million in its asset base since its inception and trades in an average daily volume of 37,000 shares a day. The ETF charges 1.43% in annual fees.
Bottom Line
Investors should note that these ETFs are less volatile, less risky and relatively stable when compared to the market-cap counterparts. In addition, these products provide hedging facilities that protect the portfolio from huge losses in turbulent times.
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Long/Short ETFs to Consider Amid Market Turmoil
The U.S. stock market is shaping up for the worst year in decades due to increased fears that the economy will plunge into a recession. This is especially true against the backdrop of persistent rising inflation and tightening monetary policies. Russia’s invasion of Ukraine and its impact on the global economy has also been weighing on investors’ sentiment.
In such a scenario, investors continue to look for the best possible ways to protect their portfolios from the potential downside while still investing in growing equities. One such great strategy in the space is long/short, which offers ways to seek profits and protection simultaneously (read: Did Safe Haven ETFs Protect Your Portfolio from Market Turmoil?).
The most popular ETFs in this space are S&P 500 Covered Call ETF (XYLD - Free Report) , First Trust Long/Short Equity ETF (FTLS - Free Report) , ProShares Large Cap Core Plus (CSM - Free Report) , AGFiQ US Market Neutral Anti-Beta Fund (BTAL - Free Report) and Leatherback Long/Short Alternative Yield ETF (LBAY - Free Report) .
What Are Long/Short ETFs?
The long/short ETFs take the best of both bull and bear prediction by involving buying and short selling of equities at the same time. This strategy is primarily used by hedge funds and involves taking long positions (buy) in stocks that are expected to increase in value while short positions (short sell) in stocks that are expected to decrease in value.
This unique investment vehicle utilizes leverage, derivatives, futures or index options in order to maximize total returns irrespective of market conditions as well as hedge out the market risk in case of elevated risk. Despite the high level of due diligence, the strategy often comes with low fees, reduced risks and no lock-in period. These are extremely flexible and provide high levels of diversification benefits. The long/short strategy is highly uncorrelated to the traditional asset classes (see: all the Long/Short ETFs here).
The long/short include various types of strategies such as market neutral, hedging, option-writing, and 130/30 strategies (130% exposure to long positions and 30% exposure to short positions). While there are a number of ETFs in this space that could ride out ups and downs of the market scenario, we have highlighted five products that could be compelling choices to play the current trends:
Market Trends
While the tech sector is bearing most of the brunt, energy is outperforming on rising oil prices. Oil resumed its strength in recent weeks due to supply disruptions and unprecedented demand. The geopolitical tensions between Russia and Ukraine and in the Middle East heightened concerns over tight energy supply amid increasing demand.
The sell-off aggravated when the Fed raised interest rates by 75 bps in its latest FOMC meeting — the biggest interest-rate increase since 1994 — and signaled continued tightening ahead, which could further weigh on stocks. Fed Chair Jerome Powell said another hike of 50 or 75 bps at the next meeting in July is likely.
The S&P 500 is now down 21% so far this year. If the year ends with this loss, the S&P 500 would register its worst annual decline since 2008 and its second-worst annual decline since 1974. On a total return basis, the index lost 37% in 2008 and 26.5% in 1974.
S&P 500 Covered Call ETF (XYLD - Free Report)
S&P 500 Covered Call ETF seeks to generate income through covered call writing, which historically produces higher yields in periods of volatility. It follows a “covered call” or “buy-write” strategy, in which the fund buys the stocks in the S&P 500 Index and “writes” or “sells” corresponding call options on the same index by tracking the Cboe S&P 500 BuyWrite Index (read: Which Stocks & ETFs Do Best When Inflation Spikes?).
S&P 500 Covered Call ETF has $1.6 billion in AUM and an expense ratio of 0.60%. It trades in an average daily volume of 586,000 shares.
First Trust Long/Short Equity ETF (FTLS - Free Report)
First Trust Long/Short Equity ETF is actively managed and intends to pursue its investment objective by establishing long and short positions in a portfolio of equity securities. The overall portfolio, under normal market conditions, will be 80 to 100% invested in long positions and 0% to 50% invested in short positions.
First Trust Long/Short Equity ETF has amassed $462.1 million in its asset base while charges 1.36% in annual fees. It trades in an average daily volume of 62,000 shares.
ProShares Large Cap Core Plus (CSM - Free Report)
ProShares Large Cap Core Plus tracks the Credit Suisse 130/30 Large Cap Index, which provides long/short positions in some of the largest 500 companies by applying a rules-based ranking and weighting methodology. It optimizes the portfolio, using the scores to overweight stocks with the most favorable outlooks and underweight or take short positions in stocks with less-favorable prospects.
ProShares Large Cap Core Plus has AUM of $411.8 million and an expense ratio of 0.45%. It trades in volume of 26,000 shares a day on average.
AGFiQ US Market Neutral Anti-Beta Fund (BTAL - Free Report)
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 (read: 5 Safe ETFs to Play Amid Recession Fears).
AGFiQ US Market Neutral Anti-Beta Fund has AUM of $175.4 million and an expense ratio of 2.53%. It trades in an average daily volume of 209,000 shares.
Leatherback Long/Short Alternative Yield ETF (LBAY - Free Report)
Leatherback Long/Short Alternative Yield ETF is an actively managed exchange-traded fund that seeks income generation and capital appreciation through shareholder-yielding equities and income-producing securities. Leatherback establishes long positions in securities it believes will provide sustainable shareholder yield and takes short positions in securities it believes will decline in price.
Leatherback Long/Short Alternative Yield ETF has accumulated $51.2 million in its asset base since its inception and trades in an average daily volume of 37,000 shares a day. The ETF charges 1.43% in annual fees.
Bottom Line
Investors should note that these ETFs are less volatile, less risky and relatively stable when compared to the market-cap counterparts. In addition, these products provide hedging facilities that protect the portfolio from huge losses in turbulent times.