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Hedge Your Portfolio Against Wild Market Swings With ETFs

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The Wall Street has been witnessing wild swings, thanks to the rapidly spreading coronavirus, which is threatening to dent global growth. Per the latest data, there are 97,870 cases worldwide and 3,347 deaths from the outbreak (read: 3 Safe ETFs for Volatile Markets).

Notably, the Dow Jones had recorded two of its best days in history, gaining more than 1,000 basis points (bps) each day on Mar 2 and Mar 4 while dropped by the same points on Mar 3 and Mar 5. The wild swings have resulted in huge volatility and unnerved investors, who are concerned about the economic impact of deadly virus on trade, ports, supply chains, consumer spending and consumer confidence. The Organization for Economic Co-operation and Development expects the intensive outbreak to slash global growth to 1.5% in 2020.

However, the central banks across the globe are enacting financial stimulus to prop up the virus-infected economy. The Federal Reserve announced an emergency rate cut of by half-percentage point to the range of 1.00-1.25%. Bank of Canada joined the Fed by cutting rates by 50 bps to 1.25%. The European Commission Bank is expected to reduce its deposit rate by 10 bps next week and Bank of England will trim its benchmark by a quarter point later this month, according to Bloomberg Economics. The People’s Bank of China will likely drop the one-year loan prime rate to 40 bps over the rest of this year, with the next move expected on Mar 20 (read: Bet on These Global ETFs on Likely Barrage of Stimulus).

Amid such scenario, 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 uncertainty. 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 $405.9 million in its asset base and trades in light volume of 3,000 shares. It charges 35 bps in fees per year.    

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

This is an actively ETF and 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 $227.7 million in its asset base and trades in average daily volume of 91,000 shares. POCT charges 79 bps from investors in annual fees and expenses (read: Last Week Saw 1st ETF Outflow in 2020: Winners & Losers).

Nationwide Risk-Based U.S. Equity ETF (RBUS - Free Report)

This ETF follows the Rothschild & Co 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 2.1% share. RBUS has accumulated $108.9 million in its asset base. It charges 30 bps in annual fees and trades in thin volume of 6,000 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 not directly correlated 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 $18.1 million in its asset base and charges 39 bps in fees per year from investors. Volume is light, exchanging 4,000 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 $12.4 million in its asset base while trading in average daily volume of 4,000 shares. Expense ratio comes in at 0.64% (read: 5 Top-Ranked Sector ETFs to Buy at Bargain Price).

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.

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