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5 ETFs to Hedge Your Portfolio Against Volatility

The fourth quarter has been nasty for the stock market due to diverse issues including U.S.-China trade woes, political malaise in Europe, flattening U.S. yield curve and concerns over global slowdown. However, the Fed’s dovish view, an accelerating economy, fresh cuts in oil supply by OPEC and its allies, and holiday optimism bode well for the stock market (read: Is Fresh OPEC+ Output Cut Enough to Boost Oil & Energy ETFs?).

Powell recently said that interest rates were "just below" the level that would be neutral for the economy — meaning they will neither speed up nor slow down economic growth. Additionally, the subsequent minutes from the central bank's latest meeting suggest that the Fed will likely raise rates this month but may stall rate hikes next year.

Further, the U.S. economy has been on a solid growth track with robust job creation, strong GDP growth, a 50-year low unemployment rate, solid wage gains, and rising consumer and business confidence.

National Retail Federation (NRF) expects holiday sales — excluding automobiles, gasoline and restaurants — to grow 4.3%-4.8% for November and December to $717.45-$720.89 billion. This is higher than the five-year average of 3.9% but lower than last year’s growth of 5.3%. Notably, Adobe expects e-commerce sales to rise 14.8% this holiday season to $124.1 billion (read: Top ETF Deals for This Holiday Season).

In order to make the most of the encouraging trend amid volatility, investors should apply some hedge 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 turbulence. Investors should note that these funds have the potential to stand out and might outperform the simple vanilla funds in case of rising volatility.

How to Play

DeltaShares S&P 500 Managed Risk ETF DMRL

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 $394.1 million in its asset base and trades in a paltry volume of 3,000 shares. It charges 35 bps in fees per year.    

Nationwide Risk-Based U.S. Equity ETF RBUS

This ETF follows the R 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 250 stocks in its basket, with none of the securities accounting for more than 2.3% share. RBUS has accumulated $109.1 million in its asset base. It charges 30 bps in annual fees and trades in a thin volume of 6,000 shares a day on average.

Cambria Value and Momentum ETF VAMO

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 100 securities, with none holding more than 2.74% of the assets. The fund has accumulated $31.2 million in its asset base while trading in average daily volume of 15,000 shares. Expense ratio comes in at 0.59% (read: Hedge Portfolio With These ETFs Ahead of Trump-Xi G-20 Meet).

Invesco S&P 500 Downside Hedged ETF PHDG

This actively managed fund seeks to deliver positive returns in rising or falling markets that are uncorrelated 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 $24.6 million in its asset base and charges 39 bps in fees per year from investors. Volume is light, exchanging 5,000 shares a day on average.


This is an ETN option tracking the S&P 500 Dynamic VEQTOR Index. VQT uses volatility futures contracts directly to hedge volatility. It increases allocation to the equity component as measured by the S&P 500 Total Return Index in times of low volatility. It increases volatility exposure as measured by the S&P 500 VIX Futures Total Return index and allocates entirely into cash if the index slumps 2% or more in the preceding five days. In this manner, the note manages to keep a check on volatility. The product has amassed $18.8 million in AUM and charges higher 95 bps in annual fees. The ETN sees paltry average daily volume of 1,000 shares.
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. These are least affected by any market turmoil and could prove to be great choices when it comes to offering protection against market downturn.

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