I know what you’re thinking: why, oh why, didn’t we all just “sell in May and walk away” like that stupid Wall Street saying recommended?
Many other articles will detail the how and why of the recent volatility. These are potential actions to take via tactical alternatives and defensive strategies that may be attractive in today’s market.
Don’t bother learning fancy options or futures trading techniques. All of these choices are ETFs that are liquid and easily tradable in most standard brokerage accounts. Remember, as with all things, you should do your own research and act on your personal goals, not what an expert tells you.
Run the market
Do you want to “short” the stock market because you think it will continue to fall? The ProShares Short S&P500 ETF SH,
is a simple and liquid way for small investors to see their investments increase when the stock market goes down. Through a system of derivative contracts, the roughly $2 billion fund aims to offer the opposite of the daily movement of the S&P 500 Index.
It’s not a faithful 1-to-1 inverse of the S&P over the long term, but it’s damn close. Case in point: This ETF is up 7.2% in the past month, while the S&P 500 is down 7.4% in the same period to Thursday’s close.
Of course, you lose when the stock market goes up.
There are also other types of “inverted” funds that short the market. For example, if you want a more tech-focused fund to bet on the downside of that specific sector, consider the Tuttle Capital Short Innovation SARK Tactical ETF,
This approximately $350 million ETF aims to provide the inverse of the fashionable investments that make up the once-fashionable and currently struggling ARK Innovation ETF ARKK,
This inverse fund is up 27.7% over the past month.
Extreme risk ‘insurance’
More an insurance policy than a way to build your nest egg, the Cambria Tail Risk ETF TAIL,
is a unique vehicle that focuses on ‘out of the money’ put options purchased on the US stock market as well as a large allocation to low-risk US Treasuries.
The idea is that these long-term options are cheap when the market is stable, but are a form of insurance that you pay to protect against disaster.
And just like your car insurance, in the event of an accident, you are covered and you are reimbursed to compensate for your losses. Proof of this approach: while the Dow Jones lost more than 1000 points on Thursday, TAIL changed tack on 2.2%.
Over the past year, however, it has fallen more than 11%, far more than the 4% drop in the S&P 500.
Many investors reduce their risk profile or generate greater income through the use of options. But if you’re not interested in do-it-yourself options trading, a fund like the JPMorgan Equity Premium Income ETF JEPI,
might be worth a look. JEPI is a $9 billion fund that has exposure to the S&P 500, but its managers also sell options on US large-cap stocks using a strategy known as “covered calls.”
In a nutshell, selling these options contracts limits your advantage if the markets go up, but guarantees cash flow if the markets move sideways or down. As a result, JEPI has returned around 8.0% over the past 12 months – and while it’s fallen 5.5% over the past month, that’s not as bad as the slippage of 7.5% of the S&P over the same period.
There is also the Global X NASDAQ 100 Covered Call ETF QYLD,
a roughly $7 billion ETF linked to the Nasdaq-100 index if you prefer to deploy this strategy on this tech-heavy benchmark instead.
Low Volatility ETFs
Low volatility funds offer a twist on traditional investment strategies by layering a screen that prevents the quickest picks. This naturally means that they can underperform during peak times for the market, but tend to be “less bad” when the going gets tough.
Take the $9 billion Invesco S&P 500 Low Volatility ETF SPLV,
This fund has underperformed over 3 or 5 years thanks to a generally favorable environment for equities where volatility has been bullish. But in 2022, it’s down 5.2%, much less than the 13% drop in the S&P 500.
Other “low volume” variants include the EFAV iShares Edge MSCI EAFE Min Vol Factor ETF,
which offers lower volatility exposure to Europe, Australasia and the Far East.
(Bonds with near-instantaneous maturity
Yes, the pricing environment is volatile. But if you shorten your duration to bonds that mature in no time, you can generate some income and more importantly avoid the risk of rising rates.
Consider that if the popular iShares 20+ Year Treasury Bond ETF TLT,
cratered more than 22% in 2022 thanks to rising rates, its sister fund the iShares 1-3 Year Treasury Bond ETF SHY,
is only down 3.1% – and has a return of around 2% to help offset that.
If you want to look beyond rock-solid Treasuries, to short-term companies as well, the actively managed Pimco Enhanced Short Maturity Active ETF MINT,
(MINT) is down just 1.85% this year and generates a similar amount in annual distributions. You are essentially treading water.
None of the short-term bond funds will help you grow your nest egg significantly, but if you want to preserve your capital with some income, funds like these are worth a look.
Another approach to bond markets is to keep one foot in bonds, but layer strategies designed to offset headwinds from rising rates. That’s what a fund like the approximately $379 million WisdomTree Interest Rate Hedged US Aggregate Bond Fund AGZD
tries to accomplish by holding high quality corporate and treasury bonds – but also a short position against US treasuries. The idea is that the companies provide the income and the short positions offset the potential decline in principal value.
And so far, that approach appears to be working, with the fund down 1.45% in 2022 while the rest of the bond market is in shambles – while returning around 2% to shareholders based on the current annualized rate.
Rates on the rise
What if you don’t want a hedge so much as a bullish play on bonds amid the current rate volatility? Then look no further than the approximately $200 million Simplify Interest Rate Hedge ETF PFIX,
The fund has a large position in over-the-counter interest rate options which are designed to increase in value with any increase in long-term rates. And given the recent actions taken by the Fed, this strategy has largely paid off.
What size? Well, this ETF jumped 5.4% on Thursday as Wall Street digested the Fed’s decision and other developments. And since the start of the year, it’s up 63% thanks to a steady rise in bond yields.
Although stocks and bonds have a role to play in a diversified portfolio, regardless of the general economic landscape, it is increasingly important to recognize that they are not the only two asset classes.
One of the easiest ways to gain diversified and hassle-free exposure to commodities through an exchange-traded product is the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC,
This $9 billion fund includes futures contracts for the world’s most popular commodities, including aluminum, crude oil, corn, gold, wheat and others. And best of all, it’s structured to protect you from annoying paperwork and that dreaded K-1 tax form that accompanies some commodity-related investment strategies.
There are, of course, dedicated commodity funds if you want a specific flavor – the $68 billion SPDR Gold Trusty GLD,
for example, or the burning United States Natural Gas Fund UNG,
which has jumped 140% since the start of the year. But if you want more of a defensive play instead of a single-commodity-based trade, diversified funds like PDBC are a better option.
Standard index funds
Are these options just confusing you? So keep that in mind – over the long term, stocks go up. Rolling 10-year returns have been positive for stocks dating back at least to the Great Depression…so the real cure for a portfolio in the red may simply be to be patient.
Consider that the bear market lows of the Financial Crisis included a reading of 666 for the S&P 500 on March 6, 2009. Today that benchmark sits over 4,000. Not too shabby, even if you bought it double or triple its bottom.
So maybe consider a long-term buy in old favorites like the SPDR S&P 500 Trust SPY,
or your favorite index fund with one of these more tactical options. As the old saying goes, you can get rich by being greedy when others are scared, although it takes time for your investment to pay off.
Jeff Reeves is a MarketWatch columnist.
Now read: These 13 Nasdaq-100 stocks saw the biggest swings up and down after the Fed raised rates. Should we be afraid?