Volatility levels are on the rise lately, given escalating North Korea tensions that have rattled global markets this month and Hurricane Harvey that has badly hit the energy sector.
Touted as one of the worst storms in history, the storm has caused large-scale flooding along the U.S. Gulf coast, affecting transport of people, food and will likely hurt economic growth if history is any guide. This is because US economic growth dropped 50% in a quarter following Hurricane Katrina in 2005 (read: Hurricane Harvey Puts These ETF Areas in Focus).
Additionally, an uncertain Fed policy and fears over the implementation of President Donald Trump’s pro-growth agenda continue to weigh on stocks. The minutes from the Fed’s July meeting reveal that policymakers are on track to unwind its $4.5 trillion balance sheet but are extremely cautious on weak inflation that might put the third interest rates hike for this year off the table. Further, bouts of weak economic data especially in front of housing and consumer prices added to the woes.
On the other hand, strong corporate earnings, still lower interest rates, and improving health of economies around the world are acting as tailwinds and will continue to drive the stock market this year. Additionally, the economy has been on a solid growth path buoyed by an impressive labor market, increase in wages, and higher consumer spending. Further, new hopes for tax reform spurred the risk appetite (read: Bet on These ETFs on New Hopes for Tax Reform).
In order to exploit the current trend amid volatility, investors should apply some hedge techniques to their equity portfolio. While there are number of ways to do this, we have highlighted five volatility hedged ETFs that could prove beneficial amid market turbulence. Investors should note that these funds have the potential to stand out and might outperform the simple vanilla funds in case of rising volatility.
How to Play
DeltaShares S&P 500 Managed Risk ETF DMRL
This ETF seeks to track the S&P 500 Managed Risk 2.0 Index, which is designed to simulate a downside-protected portfolio, which utilizes a framework that includes a targeted volatility and a synthetic option overlay to hedge the downside risk of the portfolio. It holds 508 securities in its basket with a tilt toward Apple (AAPL) while other firms account for less than 2.7% of assets. DMRL has successfully accumulated nearly $384 million in its asset base since its debut a month ago. It charges 35 bps in fees per year and has lost 1.1% since inception.
Janus Velocity Volatility Hedged Large Cap ETF SPXH
This ETF tracks the VelocityShares Volatility Hedged Large Cap Index and looks to hedge "volatility risk" in the S&P 500. It offers investors exposure to not only the S&P 500 but also both long and inverse exposure in short-term VIX futures. The product provides target equity exposure of 85% to the S&P 500 using large cap ETFs while the remaining 15% goes to the volatility strategy through one or more swaps. The fund has $50 million in AUM and charges 70 bps in annual fees. It has shed nearly 2.3% in one month (see: all Large Cap ETFs here).
Barclays ETN+ S&P VEQTOR ETN VQT
This is an ETN option tracking the S&P 500 Dynamic VEQTOR Index. VQT uses volatility futures contracts directly to hedge volatility. It increases allocation to the equity component as measured by the S&P 500 Total Return Index in times of low volatility. On the other hand, it increases volatility exposure as measured by the S&P 500 VIX Futures Total Return index and allocates entirely into cash if the index slumps 2% or more in the preceding five days. In this manner, the note manages to keep a check on volatility. The product has amassed $31 million in AUM and is a bit pricey charging 95 bps in annual fees. The ETN has lost 0.7% over the past month.
PowerShares S&P 500 Downside Hedged Portfolio PHDG
This actively managed fund seeks to deliver positive returns in rising or falling markets that are uncorrelated 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 $23.2 million in its asset base and charges 39 bps in fees per year from investors. It has declined 0.3% in the trailing one month period (read: 5 Quality ETFs and Stocks for Outperformance).
Velocity Tail Risk Hedged Large Cap ETF
This ETF provides hedging against the downside risk of an equity portfolio via exposure to VIX futures. It offers 85% exposure to large-cap equities (S&P 500Index) and a 15% exposure to a volatility component designed to efficiently hedge against large market declines. TRSK automatically rebalances with these target allocations at the end of each month. This procedure can be easily done by tracking the VelocityShares Tail Risk Hedged Large Cap Index. This approach results in expense ratio of 0.70% and has been able to manage $17.5 million in its asset base. The ETF has declined nearly 2.2% in the past month.
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. These are least affected by any market turmoil and could prove to be great choices when it comes to protection against market downturn.
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