Investors who thought that the stock markets would continue with its bull run in 2014 have definitely been caught off guard, at least for the time being. After posting a robust 30% return in 2013, S&P 500 fell around 3.6% at the close of last month, marking the first monthly decline since May 2012 (read: 3 Niche ETFs That Will Keep Flying).
The taper factor was certainly plaguing the markets and a slew of sluggish economic data did not help matters. Moreover, concerns over slowdown in the world’s second largest economy, China, contributed to the volatility.
Also, emerging market currencies are witnessing extreme volatility. Argentina’s currency decline marked the biggest tumble in more than a decade, while the currencies of other emerging markets including Turkey and South Africa weren’t spared either.
Thus, given the current volatile market scenario and that the Fed has began winding up its massive stimulus program, it might be prudent for investors to reallocate their portfolios to low risk products. (Concerned About the Market? Try These Resilient ETFs).
Low Risk ETFs
Low risk investments can prove to be quite effective in one’s portfolio in arresting downside risks as compared to high beta products. It is one of the most popular investing themes these days, given the significant jump in volatility since the start of the year.
These products have a low correlation with other assets classes, and as such, go a long way to reduce the overall portfolio risk.
Below, we have mentioned three low risk ETFs which can be good choices to add to one’s portfolio, if the current turmoil in the markets continues.
U.S. Market Neutral Anti-Beta Fund (BTAL - ETF report)
Using a long-short strategy might be a perfect way for investors to hedge their portfolio amid the volatility in the market. As such, BTAL is a good choice to do so (see all the Long-Short ETFs here).
The fund tracks the performance of the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index before fees and expenses. BTAL charges 99 basis points as fees, slightly expensive than other broad based ETFs.
BTAL takes a long position on low beta stocks, while at the same time taking a short position on high beta securities of approximately equal dollar amounts, within each sector. The index seeks to deliver the spread return between low beta and high beta stocks (stocks that are more volatile than the index).
The fund is equal weighted, dollar neutral, sector neutral and doesn’t uses leverage. The fund holds a long position in 200 stocks, having an average beta of 0.87, and a short position in another basket of 200 stocks with an average beta of 1.43.
Investors are expected to profit from this fund when the basket of long stocks outperforms the short portfolio.
Also, investors should keep in mind that due to the fund’s unique style of investing, the fund will underperform in bull markets and outperform in bear markets.
As such, the fund lost 11% in 2013. Though that’s the case for last year, things might turn around this year, if the current sluggishness in the markets continues.
IQ Merger Arbitrage ETF (MNA - ETF report)
This fund too is a great choice for investors looking for uncorrelated ETFs amid the weakness in the market. The fund focuses on the merger arbitrage space and might hold up even in uncertain economic conditions.
The fund tracks the IQ Merger Arbitrage Index, a broad benchmark of companies for which there has been a public announcement of a takeover.
The objective of the ETF is to generate returns that are representative of global merger arbitrage activity, while also including short exposure to global equities as a type of market hedge (see all the Hedge Fund ETFs here).
The fund gains by going long in the to-be-acquired company and holding until the merger is completed. This is because when such a takeover deal is made public, the companies being acquired usually see a rise in their share prices, although not up to the acquisition price.
The fund manages a small asset base of $25.5 million, charging 75 basis points as fees.
As per the most recent fact sheet, the fund holds 42 securities, while Cole Real Estate Investments, Inc. (12.36%), ViroPharma Incorporated (9.56%) and Tokyo Electron Ltd. (9.48%) are the top three holdings.
The fund has shown decent performance since the start of the year, adding 2% so far, as against a decline recorded by all major indices.
IQ Hedge Multi-Strategy Tracker ETF (QAI - ETF report)
The fund tracks the IQ Hedge Multi Strategy Index, which seeks to replicate the returns of hedge funds. The ETF is a fund of funds and uses various hedge fund strategies to reduce the overall correlation with equity markets, though the fund does not invest in hedge funds itself.
The fund manages an asset base of $653.5 million and has a decent volume with 145,887 shares traded in a day.
Some of the strategies employed by the ETF include long/short equity, global macro, market neutral, event driven, fixed income arbitrage, and emerging markets.
The fund invests in a variety of asset classes including bonds, equities, currencies and commodities and charges 75 basis points as fees.
Thus, the fund’s use of multi-strategy and multi-asset class investing lowers volatility and correlation with other assets classes. This is pretty much reflected by the fact that the fund has a low annualized standard deviation of just 7.01% and a beta of 0.21.
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