ETFs for those who feel it’s time to hedge.
To say 2018 has been volatile for investors borders on understatement. The first quarter saw the CBOE Volatility Index spike. Stocks churned in Q2 as the Federal Reserve raised rates again and signaled continued tightening to come. And the third quarter is off to a choppy start, thanks to protectionist policies in the White House. It’s hard to know where stocks will head in an environment like this. It’s even harder to rely on middle-of-the-road investments like a large-cap stock index fund. Thankfully, several exchange-traded funds allow investors to play the volatility instead of depending on the rising tide of a bull market. Here are seven ETFs to consider.
ProShares Hedge Replication ETF (ticker: HDG)
As the ticker and the name imply, the Hedge Replication ETF deploys tactics that mimic a hedge fund, including alternative asset classes with a mix of debt, equities and currencies across both developed and emerging markets. This is not a fund designed to deliver a huge profit by an all-in bet on what’s hot. Instead, it’s designed to balance risk and reward through a diversified approach in different types of investments. The fund is roughly flat in 2018, but that may not necessarily be a red flag for investors looking to limit downside risk in a challenging market.
First Trust Long/Short Equity ETF (FTLS)
Another hedge fund strategy is to play both sides of the market instead of simply hoping the stocks you buy go up. The FTLS fund adopts a long-short strategy that bets against companies it deems weak and in favor of others it expects to succeed. For instance, this fund is currently betting on tech giant Facebook (FB) to succeed, but betting against consumer staples company Pepsico (PEP). If the markets grind benignly higher, FTLS will leave some money on the table. However, if things go south those targeted bets will not just protect your portfolio but perhaps generate some profit.
IQ Hedge Multi-Strategy Tracker ETF (QAI)
The QAI fund is another long-short ETF, but not limited to equity investments. U.S. Treasurys are about 20 percent of the portfolio with modest positions on emerging market debt and corporate bonds. The list of full holdings can be a bit overwhelming, as QAI is a “fund of funds” that holds other ETFs — from sector funds to bond funds. But rather than cobble together your own comprehensive list to replicate a hedge fund strategy, this is a decent one-stop shop.
Direxion S&P 500 Bear Shares (SPDN)
This fund is a good option if you wish to ensure part of your portfolio is uncorrelated to broader market trends. By putting a bit of your cash in this inverse fund that moves almost directly opposite the S&P 500 index, you can protect yourself from downside risks. It’s risky to put all your money in here and bet against the market, which always tends to go higher in the long term. But SPDN is useful as a short-term hedge.
AdvisorShares Active Bear ETF (HDGE)
HDGE offers a more targeted bet against stocks it views as the worst of the worst. Right now, that includes short selling shoe and apparel company Skechers USA (SKX) and volatile dental products company Align Technology (ALGN). Since this exchange-traded fund selects stocks to short, it’s not as simple as going up when the market goes down. While the S&P 500 is up slightly on the year, HDGE is effectively flat, showing it can do a bit better than rigid inverse funds in a complex environment when things are uncertain.
Cambria Tail Risk ETF (TAIL)
A different strategy is evident in this tail-risk fund, which seeks to protect investors from an extreme market move through rock-solid bets in U.S. Treasurys and a unique approach to options against the S&P 500 index. Extraordinary market moves can ruin portfolios not just because they are dramatic but also because they are unexpected. That is what drove many investors to ruin during the financial crisis, when safe investments turned out to be decidedly unsafe. TAIL is down about 5 percent this year, but investors should think of that as more of a cost of insurance than underperformance.
PowerShares S&P 500 Low Volatility Portfolio (SPLV)
A unique approach of insurance rather than seeking profit is offered by SPLV, which is weighted toward stocks that show the most stability and away from the most volatile. The fund’s top sector includes utilities such as Duke Energy Corp. (DUK). This group of stocks makes up about 25 percent of the portfolio at present, and is about as stable as investments can come given the geographic monopolies and built-in demand of most electricity providers. There isn’t much growth here, but a focus on less volatility may be very attractive to some investors in the current environment.
More from U.S. News
7 Ways to Invest in Emerging Markets
8 Investing Do’s and Don’ts During Market Volatility
7 ETFs That Act Like a Hedge Fund originally appeared on usnews.com
