Be it equities or bonds, market complacency remained at extremely high levels and volatility is hovering at exceptionally low levels. Bank of America’s MOVE Index, which measures volatility in the U.S. Treasury market, plunged to an unparalleled 46.9 at the close of Monday’s trading session, as per Bloomberg. On the other hand, the CBOE Volatility Index was 2 points away from the all-time low of 8.84 in July.
A 5% correction has not been experienced is almost 18 months. Average retail investors’ cash exposure dropped to the lowest since the year 2000, as per an article published on Seekingalpha.
But this is not being able to keep several investing gurus and brokerage houses from warning about an impending market crash. The likes of billionaire investor Howard Marks and Jeffrey Gundlach of DoubleLine Capital believe that stocks are as pricey as they were around the dotcom bubble (read: Follow Gundlach with These ETF Strategies).
Howard Marks indicated that “the Shiller Cyclically Adjusted PE Ratio, known as the Shiller CAPE, is at its highest level since only two other times in the market’s history.” Just before the Great Depression in 1929 and mid-1997 to mid-2001, the CAPE ratio was at higher levels than we are seeing now.
Many investors in fact have started investing in low-volatility funds. Volatility-focused mutual funds and exchange-traded funds and notes saw net inflows of $1.49 billion in the first seven months of this year, as per Morningstar Inc.
iPath S&P 500 VIX Short-term Futures ETN (VXX - Free Report) raked in about $699 million in the first seven months of 2017, according to Morningstar, while ProShares VIX Short-term Futures ETF (VIXY - Free Report) fetched about a net inflow of $102.3 million in that time frame.
Risk Aversion Building in U.S Equities
Volatility levels flared up lately on Trump’s provocative rhetoric against North Korea’s nuclear test. In fact, on August 8, U.S. equities shed about $1.22 billion in assets, as per etf.com, with SPDR S&P 500 ETF Trust (SPY - Free Report) losing about $1.20 billion (read: Time to Short U.S. Equities with ETFs?).
On August 10, the broader market saw a significant sell-off on North Korea-U.S. tension. Big U.S. ETFs, (SPY - Free Report) lost about 1.4%, SPDR Dow Jones Industrial Average ETF Trust (DIA - Free Report) shed about 0.9% and PowerShares QQQ Trust, Series 1 (QQQ - Free Report) is off over 2%. Strategists now expect the S&P 500 to slip to 2337, “just over 100 points further, after a 35 point selloff Thursday”, as perCNBC (read: ETFs to Profit from US-North Korea Tensions).
How to Handle Impending Volatility?
In such a euphoric market, many may not want to be exposed to inverse equities ETFs or short equities ETFs. This outright bearish and risky stand may not suit many investors. Those set of investors may land on some long/short or alternative ETFs, which may not offer outstanding returns but will be able to hedge one’s portfolio.
QuantShares U.S. Market Neutral Anti-Beta Fund (BTAL - Free Report)
The underlying index, which is compiled by Dow Jones Indexes, is equal weighted, dollar neutral, sector neutral and is not levered. The index identifies the lowest beta stocks as long positions and highest beta stocks as short positions, of approximately equal dollar amounts, within each sector.
U.S. Market Neutral Momentum Fund (MOM - Free Report)
The underlying index – which is compiled by Dow Jones Indexes, is equal weighted, dollar neutral, sector neutral and not levered. The index rebalances monthly by identifying the highest momentum stocks as long positions and lowest momentum stocks as short positions, of approximately equal dollar amounts, within each sector.
First Trust Alternative Absolute Return Strategy ETF (FAAR - Free Report)
This active ETF looks to achieve long-term total returns, using a long/short commodities strategy.
30 Year TIPS/TSY Spread ETF (RINF - Free Report)
The underlying Citi 30-Year TIPS Index tracks the performance of long positions in the most recently issued 30-year TIPS and duration-adjusted short positions in U.S. Treasury bonds of, in aggregate, approximate equivalent duration dollars to the TIPS.
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