4 Alternative ETF Strategies for a Rocky Market
This article was originally published on ETFTrends.com.
As volatility grips the markets, stock investors could turn to alternative investment strategies and ETFs to hedge against further downside risks.
"At present, we believe a more defensive positioning could be warranted as the current bull market enters its latter stages," Gaurav Sinha, Asset Allocation Strategist for WisdomTree, said in a note.
Sinha argued that accelerating correlations not only act as a precursor for spikes in the CBOE Volatility Index or VIX, a widely observed gauge of market fear, but also pointed to potentially unstable swings in values of the VIX, which would reflect greater uncertainty for U.S. stocks.
In the current market environment, investors will have to face a number of potential risk catalysts. For example, we are entering a period of rising interest rates as the Federal Reserve tightens its monetary policy. Global central banks are also adjusting their balance sheets after the unprecedented post-financial-crisis quantitative easing policies. Additionally, lingering concerns over trade disputes between the U.S. and China continue to add to the uncertain outlook.
"In our view, none of these challenges are insurmountable for equity markets if earnings continue to grow. However, an alternative method of stock selection and volatility mitigation may become necessary," Sinha added.
For example, something like the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (PUTW) and the WisdomTree CBOE Russell 2000 PutWrite Strategy Fund (Cboe:RPUT) can help investors generate income by selling volatility through writing options. PUTW includes one- and three-month Treasury bills and sells or “writes” one-month, at-the-money, S&P 500 Index puts. RPUT is a put write strategy on the Russell 2000 Index. Investors can use these strategies to help lower portfolio beta and reduce downside risk. The strategy can generate higher potential income if the VIX stays elevated, and the income generated can offset potential losses if equities pulled back, especially in a highly correlated and volatile market.
"Both strategies aim to provide a positive correlation to equities, but with significantly lower volatility," Sinha said.
Additionally, investors can turn to long/short strategies, such as the WisdomTree Dynamic Long/Short U.S. Equity Fund (DYLS) and the WisdomTree Dynamic Bearish U.S. Equity Fund (DYB) , which hedge and seek to provide market-neutral and bearish positioning, respectively, in markets where fundamentals are deteriorating. These alternative ETF strategies can help investors by diversifying exposure in declining markets or limit downside risk.
"These are long/short equity strategies, which seek to add value through security selection, as well as opportunistically hedging market risk, when fundamentals are mixed and volatility is increasing," Sinha said.
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