I know what you’re thinking: Why, oh why, didn’t we all just “sell in May and go away” like that stupid Wall Street saying recommended?
On the heels of a 1/2-point boost to interest rates by the Federal Reserve on Wednesday – the biggest such increase in 20 years – the stock market sank on Thursday; the Dow Jones Industrial Average DJIA,
Plenty of other articles will hash out the hows and whys behind recent volatility. This is about potential actions to take via tactical alternatives and defensive strategies that may be attractive in the current market.
Don’t worry about learning sophisticated options or futures trading techniques. All these picks are ETFs that are liquid and easily tradable in most standard brokerage accounts. Just remember that, as in all things, you should do your own research and make moves based on your personal goals – not on what some pundit tells you.
Short the market
Want to “short” the stock market because you think it will keep falling? The ProShares Short S & P500 ETF SH,
This isn’t a faithful 1-to-1 inverse of the S&P over the long term, but it’s pretty darn 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 through Thursday’s close.
There are other flavors of “inverse” funds that short the market, too. For instance, if you want a fund more targeted to tech to bet on the downside of this specific sector, consider the tactical Tuttle Capital Short Innovation ETF SARK,
Of course, when the stock market goes up, these inverse funds go down. And in the case of SARK, it could go down just as fast.
Tail risk ‘insurance’
More of an insurance policy than a way to build your nest egg, the Cambria Tail Risk ETF TAIL,
The idea is that these longshot options don’t cost much when the market is stable, but are a form of insurance you’re paying for to guard against disaster.
And just like your auto insurance, when there’s a crash you are covered and get paid back to offset your losses. As proof of this approach: While the Dow Jones lost more than 1,000 points on Thursday, TAIL tacked on 2.2%.
Over the past year, however, it’s down more than 11%, much more than the S&P 500’s 4% decline. That’s the price you pay for this kind of insurance when it goes unneeded — but in volatile times like these, the backstop comes in handy.
Covered calls
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,
In a nutshell, selling these options contracts caps your upside if markets are ripping higher but guarantees a flow of cash if markets move sideways or lower. As a result JEPI has a yield of about 8.0% over the last 12 months – and while it has fallen 5.5% in the past month, that’s not as bad as the S&P’s 7.5% skid in the same period.
There’s also the Global X NASDAQ 100 Covered Call ETF QYLD,
Low-volatility ETFs
Low-volatility funds offer a variant on traditional investing strategies by overlaying a screen that keeps out the fastest-moving picks. This naturally means they may underperform during red-hot periods for the market, but that they tend to be “less bad” when things get rocky.
Take the $9 billion Invesco S&P 500 Low Volatility ETF SPLV,
Other “low vol” variants include the globally focused iShares Edge MSCI EAFE Min Vol Factor ETF EFAV,
(Nearly) instant maturity bonds
Yes, the rate environment is volatile. But if you shorten your duration to bonds that mature in almost no time at all, you can generate a little bit of income and mostly avoid the risk of rising rates.
Consider that while the popular iShares 20+ Year Treasury Bond ETF TLT,
If you want to look beyond rock-solid Treasurys to short-term corporates, too, the actively managed the Pimco Enhanced Short Maturity Active ETF MINT,
Neither short-term bond fund will help grow your nest egg significantly, but if you want capital preservation with a bit of income, then funds like these are worth a look.
Rate-hedged bonds
Another approached to fixed-income markets is to keep a foothold in bonds but to overlay strategies that are designed to offset the headwinds of rising rates. That’s what a fund like the roughly $379 million WisdomTree Interest Rate Hedged U.S. Aggregate Bond Fund AGZD,
This may sound counter-intuitive but the idea is that the corporate bonds provide the income stream, and the short positions theoretically net out vs. these long positions to offset the potential decline in principal value.
Theoretically is the operative word, as it is not an exact science. But thus far that approach seems to be working, with the fund down 1.45% in 2022 while the rest of the bond market has been in shambles – all while yielding about 2% back to shareholders based on the current annualized rate.
Ride rising rates
What if you don’t want a hedge so much as an upside play on bonds amid the current rate volatility? Then look no further than the $200 million or so Simplify Interest Rate Hedge ETF PFIX,
The fund holds a large position in OTC interest-rate options that are designed to go up in value alongside any increase in long-term rates. And given the Fed’s recent moves, this strategy has been paying off in a big way.
How big? Well, this ETF surged 5.4% on Thursday as Wall Street digested the Fed’s move and other developments. And year-to-date, it is up 63% thanks to a steady upward climb in bond yields.
Commodities
While stocks and bonds have a role to play in a diversified portfolio regardless of the broader economic landscape, it’s increasingly important to acknowledge that these are not the only two asset classes.
One of the easiest ways to get diversified and headache-free exposure to commodities via an exchange-traded product is the Invesco Optimum Yield Diversified Commodity Strategy No K-1 ETF PDBC,
There are, of course dedicated commodity funds if you want a specific flavor – the $68 billion SPDR Gold Trusty GLD,
Standard index funds
Do these options only confuse you? Then keep this 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 can be simply 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, this benchmark sits at more than 4,000. And even if you had the absolute worst timing pre-crisis and invested everything at the pre-Lehman highs, you’d still have more doubled your money considering the index’s closing-bell peak of 1,565 in 2007.
So maybe consider a long-term purchase in old favorites like the SPDR S&P 500 Trust SPY,
Jeff Reeves is a MarketWatch columnist. He doesn’t own any of the funds mentioned in this article.
