Volatility has been the key theme on Wall Street over the past couple of months. Although earnings optimism has once again encouraged investors to take on risk, strained U.S.-China trade ties and escalating tensions in Syria are acting as dampeners.
Notably, the United States and its Western allies are jointly mulling over a possible military action as early as the end of this week over a suspected poison gas attack in Syria. The move could provoke a response from Russia as Moscow warned that any U.S. military action would have serious consequences (read: Russia ETFs Hit by Sanctions and Syria Attack).
Aside geopolitics, stock fundamentals look strong given the dual tailwinds of solid earnings and tax reform. Earnings for the S&P 500 index are expected to grow 16% from the same period last year on 7.4% higher revenues. Earnings growth is much higher than the Q4 growth of 13.5%, and represents the highest quarterly earnings growth in seven years. Meanwhile, $1.5 trillion tax cuts will perk up the economy and save billions for corporations, leading to reflation trade and higher earnings.
Additionally, the confidence in the economy and the nine-year old bull market has been robust buoyed by increasing consumer spending, rising consumer confidence and 17-year low unemployment (read: Bet on These Sector ETFs & Stocks for Q1 Earnings).
In order to make the most of the encouraging trend amid volatility, investors should apply some hedge 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 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 - Free Report)
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 $380.8 million in its asset base and trades in a light volume of 9,000 shares. It charges 35 bps in fees per year.
Cambria Value and Momentum ETF (VAMO - Free Report)
This is an actively managed ETF providing exposure to a portfolio of companies that offer strong characteristics by focusing on all three factors — value, momentum, and tactical hedging — with the added benefit of lower volatility and protection from market downturns. It results in a basket of 102 securities, with none holding more than 1.85% of assets. The fund has accumulated $32.2 million in its asset base while trades in average daily volume of 12,000 shares. Expense ratio comes in at 0.59% (read: 8 ETF Predictions for 2018).
Nationwide Risk-Based U.S. Equity ETF (RBUS - Free Report) )
This ETF follows the R Risk-Based US Index and employs a risk-based strategy that seeks to provide upside potential while protecting against losses stemming from volatility. It holds well-diversified 250 stocks in its basket, with none of the securities accounting for more than 2.11% share. RBUS has newly debuted in the space and accumulated $114.1 million since last September. It charges 30 bps in annual fees and trades in a thin volume of 2,000 shares a day on average.
PowerShares S&P 500 Downside Hedged Portfolio (PHDG - Free Report)
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 $25.7 million in its asset base and charges 39 bps in fees per year from investors. Volume is light exchanging 7,000 shares a day on average (read: Volatility Hedged ETF Hits New 52-Week High).
Barclays ETN+ S&P VEQTOR ETN (VQT - Free Report)
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 $24.4 million in AUM and charges higher 95 bps in annual fees. The ETN sees paltry average daily volume of 4,000 shares.
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 offering protection against market downturn.
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