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How to Hedge Stock Volatility With ETFs

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The global stock market is caught in a vicious circle of uncertainty arising from rising interest rates, intensifying trade tension between the United States and its allies, ongoing troubles in emerging markets, and mid-term election in November. Additionally, fresh threats of Saudi turmoil added to the chaos as the disappearance of Washington Post columnist Jamal Khashoggi resulted in a fear of U.S. sanctions- another major blow to the global stock market.

Nonetheless, the economic fundamentals remain sound given the raft of upbeat data, which shows that the economy is hot with unemployment dropping to 3.7% for the first time in nearly 50 years, consumer spending and confidence on the rise, and recovery in retail sales.

Further, a massive $1.5-trillion tax cut will create an economic surge, boosting job growth and reflation trade. It will further accelerate earnings, leading to increased dividend and buyback activities. Additionally, the tax repatriation will allow companies to bring offshore cash back home, paving the way for increased mergers and acquisitions. A combination of all these factors bodes well for the stock market (read: Winning ETF Strategies for the Fourth Quarter).

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 $419.4 million in its asset base and trades in a light volume of 9,000 shares. It charges 35 bps in fees per year (read: A New ETF in Market Promises Diversification).    

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 2.3% share. RBUS recently debuted in the space and has accumulated $111.2 million in its asset base. It charges 30 bps in annual fees and trades in a thin volume of 10,000 shares a day on average.

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 101 securities, with none holding more than 2.2% of the assets. The fund has accumulated $35.7 million in its asset base while trading in average daily volume of 14,000 shares. Expense ratio comes in at 0.59% (read: 5 Solid High Dividend Value ETFs & Stocks to Buy Now).

Invesco S&P 500 Downside Hedged ETF (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 $26.6 million in its asset base and charges 39 bps in fees per year from investors. Volume is light, exchanging 5,000 shares a day on average.

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 $21.4 million in AUM and charges higher 95 bps in annual fees. The ETN sees paltry average daily volume of 1,000 shares (read: 7 Leveraged/Inverse ETFs Off to a Strong Start in October).
    
Bottom Line

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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