Back to top

Image: Bigstock

Hedge Market Volatility With These ETFs

Read MoreHide Full Article

The U.S. stock market has shown a strong rally, having climbed about 40% since hitting March lows. But the ascent has been uneven over the past week as renewed concerns over coronavirus fears have emerged after the reopening of the economy.

The latest report showed that new COVID-19 infections soared to record highs in six U.S. states — Arizona, Florida, Oklahoma, Oregon and Texas — on Jun 16, marking a rise in cases for the second consecutive week. Hospitalizations are also rising or are at record highs. Additionally, tensions with China have risen given that President Trump has threatened to cut ties with China, a day after his top diplomats held talks with Beijing and his trade representative said he did not consider decoupling U.S. and China’s economies a viable option.

However, a flood of liquidity in the form of fiscal and economic stimulus will continue to provide an upside to the stocks. The Federal Reserve steeped in for more stimulus and said that it would begin purchasing individual corporate bonds as part of its emergency lending program to inject liquidity into the virus-stricken economy. Additionally, President Donald Trump’s administration is preparing a $1 trillion infrastructure proposal to spur the world’s largest economy back to life (read: Fed's New Stimulus Regains Confidence: 4 ETF Picks).

Further, the latest bout of economic data related to manufacturing, job data, housing, retail sales and consumer confidence indicates that the economy is recovering faster than expected. This has bolstered investors’ confidence.

In such a scenario, investors should apply some hedging 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 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

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 $381.5 million in its asset base and trades in light volume of 9,000 shares. It charges 35 bps in fees per year (read: Worried About Volatility? Invest in These ETFs).

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 $260.6 million in its asset base and trades in average daily volume of 104,000 shares. POCT charges 79 bps from investors in annual fees and expenses.

Nationwide Risk-Based U.S. Equity ETF

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 247 stocks in its basket with AUM of $105 million. 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 $55.2 million in its asset base and charges 39 bps in fees per year from investors. Volume is light, exchanging 29,000 shares a day on average (read: Renewed Coronavirus Fears Put Low-Beta ETFs in Focus).

Cambria Value and Momentum ETF (VAMO - Free Report)

This is an actively managed ETF providing exposure to a portfolio of companies that focus 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 105 securities. The fund has accumulated $10.9 million in its asset base while trading in average daily volume of 4,000 shares. Expense ratio comes in at 0.64%.

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 >>