The market rally that began in late 2022 and into early 2023 has lost some of its mojo thanks to inflation and rising interest rate fears. That’s causing more market volatility than investors were familiar with last year, but there are ways to brace for more market movements, including the use of an equal-weight strategy.
The options market is already seeing an increase in bets for more market volatility. Within the past month, the CBOE Volatility Index (VIX) has risen just over 17%.
“More call options betting that the Cboe Volatility Index, or VIX, will rise have changed hands on an average day in February than at any time since March 2020, Cboe data shows,” a Wall Street Journal report said.
Year-to-date, the index is actually down about 5.4%, as of the end of February. As mentioned, the market rally that began late last year spilled over into the beginning of 2023 before hot economic data spurred inflation fears, while the Federal Reserve noted that it would take time in order to get inflation under control.
“After lying relatively dormant for months, the VIX, also known as Wall Street’s fear gauge, rose above 23 last week, its highest level since the first few trading days of the year,” the report added. “Readings below 20 typically signify complacency, while those above 30 signal investors are scurrying for protection.”
Smooth Out Volatility With an Equal-Weight Strategy
In order to brace for more market volatility ahead, investors can opt to use an equal-weight strategy that will prevent their portfolios from being too top-heavy in certain stocks. As such, spreading allocations around to a number of holdings as opposed to a chosen few can help limit volatility.
Rather than hold a number of stocks, this equal-weight strategy is available in the ALPS Equal Sector Weight ETF (EQL ). The fund seeks investment results that replicate the NYSE Equal Sector Weight Index (NYXLEW).
EQL utilizes a fund-of-funds ETF structure, meaning it is essentially an ETF that invests in other ETFs. The fund invests equal proportions in 11 Select Sector SPDRs, so investors get specific exposure to various sectors as opposed to various stocks.
The fund maintains about a 9% exposure to energy, financials, healthcare, industrials, utilities, communication services, consumer staples, real estate, materials, technology, and consumer discretionary. EQL carries a 0.27% expense ratio.
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