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Stock ETFs to Weather Market Volatility


Despite a bumpy start to the year, stock exchange traded funds could continue to expand but don’t expect a repeat of last year as the market rides out a more volatile year.

So far, U.S. economic data has been mixed, with a weak employment report and dip in manufacturing activity weighing on the market. The disappointing data, along with slowing growth in the emerging markets, sent global equities tumbling and pushed volatility higher – the CBOE Volatility Index, or VIX, hit a 13-month high of 21.4 last Monday.

Nevertheless, Russ Koesterich, managing director, BlackRock’s global chief investment strategist and global chief investment strategist for iShares, points out that stocks could provide better value going ahead, compared to bonds.

“We do expect equity gains will be more muted this year than last year and the ride will be rockier, but we would also suggest that periods of weakness like we have seen over the past couple of weeks provide opportunities to selectively add to equity exposure while trimming bond holdings,” Koesterich said in a note.

“As such, I continue to believe that equities will outperform bonds this year, and I view recent market softness as an opportunity to selectively add to equity positions and trim bond exposure,” added Koesterich.

Consequently, investors who are seeking equity exposure but want to limit the swings may turn  more conservative large-cap, quality names.

For instance, The SPDR Dow Jones Industrial Average ETF (DIA) ,  SPDR S&P 500 (SPY) and PowerShares QQQ (QQQ) provide exposure to three prominent U.S. benchmarks, the Dow Jones Industrial Average, S&P 500 and Nasdaq-100, respectively.

Additionally, the iShares S&P 100 ETF (OEF) and Vanguard Mega Cap ETF (MGC) specifically target mega-capitalization companies.

Alternatively, the VelocityShares Volatility Hedged Large Cap ETF (SPXH) and the VelocityShares Tail Risk Hedged Large Cap ETF (TRSK) provide two targeted strategies that limit volatility in large-caps. Both take long position in the S&P 500 and a short position in short-term VIX futures, but TRSK is designed to hedge the “tail risk,” or normal distributions beyond three standard deviation, and SPXH targets a neutral exposure. [VelocityShares Launches Two Hedged Equity ETFs]

Moreover, there are a number low-volatility ETFs, like the PowerShares S&P 500 Low Volatility Portfolio (SPLV) and the iShares MSCI USA Minimum Volatility ETF (USMV) , that screen for the least volatile stocks. Through Feb. 10, SPLV and USMV were ahead of the S&P 500 on a year-to-date basis. [Learning to Love Low Vol ETFs…Again]

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.