Back to top

Image: Bigstock

5 ETFs to Hedge Against Market Volatility

Read MoreHide Full Article

Renewed trade war fear is once again playing foul in Wall Street, leading to huge volatility. This is especially true given that President Donald Trump raised previously delayed tariffs on Chinese goods worth $200 billion on May 10 midnight. Trump then blacklisted Chinese firm Huawei Technologies and 26 of its affiliates, forbidding them from doing business with American companies (read: 5 Tech ETFs Losing the Most on Huawei Ban: What's Ahead?).

The move has escalated fears of lingering trade war between the two world’s two largest economies that would crimp global sales growth. However, temporary exemption to Huawei, which will allow it to purchase American-made goods in order to maintain existing networks and provide software updates to existing Huawei handsets for 90 days has reignited optimism.

Additionally, a strong economy, which bodes well for the stock market, supported the ascent. The U.S. economy added jobs consecutively for 103 consecutive months, representing the longest-ever streak of job creation. The unemployment rate has dropped to 3.6% — the lowest in nearly 50 years — while wages rose at an annual rate of 3.2% in April, the ninth consecutive month of more than 3% growth.

Strong hiring and increasing wages will boost consumer spending and keep the economy on a solid growth path. The American economy expanded at a faster-than-expected rate of 3.2% in the first quarter of 2019, marking the best GDP growth to start the year since 2015. Americans are also feeling optimistic with consumer sentiment hovering at a 15-year high in early May. Additionally, a surge in oil price and the Fed’s decision of not raising interest rates this year after seven hikes over the past two years are favoring consumers (read: Consumer Sentiment Jumps to 15-Year High: ETFs to Buy).

In order to make the most of the encouraging trend amid volatility, investors should apply some hedging 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 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 $411.1 million in its asset base and trades in a light volume of 7,000 shares. It charges 35 bps in fees per year.    

Innovator S&P 500 Power Buffer ETF (POCT - Free Report)

This fund seeks to track the return of the S&P 500 Price Return Index, up to a predetermined cap, while buffering investors against the first 15% of losses over the outcome period. It has amassed $138.2 million in its asset base within eight months of its debut and trades in average daily volume of 54,000 shares (read: Best and Worst ETFs Halfway Through Q2).

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 251 stocks in its basket, with none of the securities accounting for more than 2.3% share. RBUS has accumulated $110 million in its asset base. It charges 30 bps in annual fees and trades in thin volume of 11,000 shares a day on average.

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 $38.5 million in its asset base and charges 39 bps in fees per year from investors. Volume is light, exchanging 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 3% of the assets. The fund has accumulated $19.2 million in its asset base while trading in average daily volume of 10,000 shares. Expense ratio comes in at 0.59% (read: Markets & ETFs Digest Trade Spat: Is It a Dead-Cat-Bounce?).

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 and are least affected by any market turmoil. So, they could prove to be great choices when it comes to offering protection against market downturn.

Want key ETF info delivered straight to your inbox?

Zacks’ free Fund Newsletter will brief you on top news and analysis, as well as top-performing ETFs, each week. Get it free >>