At the 11th hour, the U.S. government once again averted disaster. Enough republicans and democrats agreed to both raise the debt ceiling and reopen the government, ending the first government shutdown since the mid 90s, and ending worries over a debt default for now.
However, a long term deal was not reached, as legislators pushed out worries about another shutdown to just mid-January 2014, while the next debt ceiling looks to be hit in February of next year. This means that we could be back at these concerns once more in just a couple of months, suggesting that we aren’t out of the woods yet on the issue, though there is definitely some short term relief (see Beat Hedge Funds with these ETFs).
Given this, it seems reasonable to assume that another bout of volatility is just around the corner. Fortunately, there are some solid ETFs that can protect portfolios in sluggish market environments, and could be worth a closer look the next time things get rocky. While there are plenty of options in this segment, we have highlighted three of our favorites below:
PowerShares S&P 500 BuyWrite Portfolio (PBP)
This ETF could be an interesting choice for investors seeking to utilize a covered call strategy in an exchange-traded vehicle. The product writes call options on the S&P 500, selling slightly out-of-the-money, or at-the-money calls, on the index.
This approach looks to generate income, though if the S&P 500 surges, upside potential will be capped. However, the income level looks to be boosted—thanks to the proceeds from selling the options—giving this product a decent yield of 3.6% in 12 month yield terms.
The fund is a bit pricey when compared to other choices in the market, but you make up for this in terms of yield. Just remember that in roaring bull markets, PBP will probably underperform, as the covered call strategy definitely takes away from the gains potential and especially so with a short time horizon.
PowerShares S&P Downside Hedged Portfolio (PHDG)
Another option to reduce risk is by taking a look at PHDG from PowerShares. This ETF follows the S&P 500 Dynamic VEQTOR Index which looks to dynamically allocate between three different asset classes; equities, volatility, and cash.
The product focuses on the S&P 500, except for an allocation to volatility which varies depending on the trend that volatility is in, and the realized levels of volatility in the market. This can range from a 2.5% allocation to volatility, all the way up to a 40% allocation when volatility levels are skyrocketing and are quite high (also see all the Inverse Equity ETFs here).
This strategy looks to tap into volatility’s general outperformance when fear levels are high, while also acting as a hedge as well. However, volatility will often underperform during smooth markets, so PHDG may compare unfavorably to many ETFs during solid market environments.
Ranger Equity Bear ETF (HDGE)
For a true hedge play that goes short in stocks, investors can look to HDGE from AdvisorShares. This product focuses on a few dozen companies that have questionable earnings quality, looking at items like aggressive revenue recognition (among others) with a forensic accounting method.
Hopefully, this pushes the product into the lowest quality companies, or in other words, the ones most likely to drop in a bearish market environment. And, even if things do go well, these companies—thanks to their questionable accounting practices—may be underperformers, making HDGE an interesting hedging tool (see 3 Niche ETFs Crushing the Market).
Just remember that fees are quite high in this product, especially when compared to broad market funds, though also when compared to hedging ETFs that utilize futures exposure instead. Still, HDGE remains one of the few ways to track these types of companies with short exposure.
More on Hedging ETFs
For more on these ETFs, make sure to watch our short video on the subject:
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