ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Alternatives
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Disruptive Technology
    • Dividend
    • Dual Impact
    • Emerging Markets
    • Energy Infrastructure
    • ESG
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Fixed Income
    • Free Cash Flow
    • Future ETFs
    • Global Diversification
    • Gold & Silver Investing
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Market Insights
    • Megatrends
    • Modern Alpha
    • Multi-Asset
    • Night Effect
    • Portfolio Strategies
    • Retirement Income
    • Richard Bernstein Advisors
    • Tax Efficient Income
    • Thematic Investing
    • Volatility Resource
  • Tools
    • ETF Screener
    • ETF Country Exposure Tool
    • ETF Sector Tracker Tool
    • ETF Database Categories
    • Head-To-Head ETF Comparison Tool
    • ETF Stock Exposure Tool
    • ETF Issuer Fund Flows
    • Indexes
    • Mutual Fund To ETF Converter
    • ETF Data for Journalists
    • ETF Nerds
  • Research
    • First Bitcoin ETF
    • ETF Education
    • Equity Investing
    • Dividend ETFs
    • Leveraged ETFs
    • Inverse ETFs
    • Index Education
    • Index Insights
    • Top ETF Sectors
    • Top ETF Issuers
    • Top ETF Industries
  • Webcasts
  • Themes
    • AI ETFs
    • Blockchain ETFs
    • See all Thematic Investing ETF themes
    • ESG Investing
    • Marijuana ETFs
  • Multimedia
    • ETF 360 Video Series
    • ETF Trends on Videos
    • ETF Trends on Podcasts
    • ETF Prime Podcast
  • Company
    • About Us
    • Swag Store
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. ETF Investing
  2. How to Gauge Risk Appetite With ETFs
ETF Investing
Share

How to Gauge Risk Appetite With ETFs

Stoyan BojinovJul 19, 2016
2016-07-19

ETFs are often regarded as useful price discovery tools as they are able to deliver liquid access to previously difficult-to-reach markets, but that’s not the only way to utilize them that doesn’t involve making a transaction.

Traders and investors often look to ETFs as a means to gauge risk appetite levels across the investable universe for a variety of reasons.

See also How to Spot a Style and Sector Rotation with ETFs.

Why Risk Appetite Matters

Let’s dive into what this means and how it can help you make better decisions.


Content continues below advertisement

What Is Risk Appetite

Risk appetite simply refers to investors’ willingness to take on risk in the market at any given moment. The higher the investor’s risk appetite is, the more bullish price action we’re likely to see in the market; the lower the risk appetite is said to be, the more likely we are to observe weakening momentum – if not altogether a downtrend in the market.

Put another way, risk appetite is your tolerance for loss while still keeping in mind your investment objective; as such, a higher risk tolerance implies a greater willingness to take chances, and vice versa.

How to Utilize Risk Appetite Information

You might be wondering why gauging the overall risk appetite in the market matters in the first place. Let’s assume you have a great sector-momentum trading strategy with a solid track record, but after time you notice that your success rate and profit levels are deteriorating. What gives? Your strategy hasn’t changed. Ah, but the market environment has, and so too has investors’ risk appetite.

It pays to be aware of decreasing risk appetite levels in the market as this is likely to challenge many swing-trading and momentum-focused strategies; for instance, in a choppy market with weak risk appetite levels, it’s not uncommon to observe breakout trades failing quickly after triggering. Also, this sort of environment is ripe for quick changes in direction and known for kicking people out of trades too early, despite proper risk management.

Remember that having a great strategy is only part of the battle; the harder step is knowing when to apply it, and more specifically when to be aggressive or conservative with it. If you have a good sense of risk appetite levels, it could help your conviction on both entry and exit.

5 Ways to Gauge Risk Appetite With ETFs

Here are some of the most popular ways that investors might look to ETFs, and especially relevant pairs, in order to gauge risk appetite levels across the broad market, or zoom-in on a specific asset class:

  1. How are stocks trading relative to bonds? This longstanding comparison has been skewed in recent years thanks to the unprecedented intervention on the part of central bankers. The historical rule of thumb is that equities and fixed income will move inversely of each other. Simply put, if stocks are outperforming bonds, you can bet that risk appetites are probably strong.
  1. Are the major indexes trading above/below their 200 day moving averages? This is another way to gauge whether we are in a bull or bear market aside from the more traditional definition (losses upwards of 20%). Keep an eye on these tickers for a quick read of the S&P 500 (SPY A), NASDAQ (QQQ B+), (DIA B+), and the Russell 2000 (IWM A-).
  1. Are Emerging Markets leading Developed Markets? Compare EFA (or SPY) to EEM for a quick gauge; if the latter is stronger, it’s fair to say that risk appetite is strong, although you have to be careful and see if this applies broadly or is geography-specific.
  1. Which sectors are leading/lagging? Sometimes when you can’t read the whole market, it pays to look at risk appetites on a sector or even industry level. Strong risk appetites are often characterized by cyclical sectors like consumer discretionary (XLY A) and technology (XLK A) leading in lieu of more defensive ones like utilities (XLU A) or staples (XLP A).
  1. How are the safe havens acting? If you notice momentum pick up in gold (GLD A-), Long-Term Treasuries (TLT B+), or the U.S. dollar (UUP B), there is likely a de-risking wave developing in the market; in this case, you may choose to wait before dialing up your exposure to risky assets again.

The Bottom Line

ETFs can be utilized in countless ways that don’t involve transacting them. One popular approach is to look to ETFs and relevant pairs as a means of gauging risk appetite levels in the market. This can be useful because it gives you better insight as far as what strategies in your arsenal may have a higher chance of success given the environment.

Follow me @SBojinov

» Popular Pages

  • Tickers
  • Articles

Feb 01

This Week’s Asset Classes: Bonds Bleed, Equities Lead

Feb 01

Best & Worst Monthly Performers: February 1 Edition

Feb 01

Todd Rosenbluth on Fed, FI, and Morgan Stanley ETFs

Feb 01

Stocks Rally After Fed Announces 25-Basis-Point Rate Hike

Feb 01

BYD Expecting Mammoth 2022 Earnings: KraneShares Invests

Feb 01

High Yield Well-Positioned for This Year

Feb 01

Target Long-Term Corporate Bonds With VCLT

Feb 01

Increased Q4 Dividends for Several Midstream Companies

Feb 01

Why RIAs Should Invest in the ETF Structure

Feb 01

Eye DNA Synthesis Advances in an Active Biotech ETF

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

VOO

Vanguard S&P 500 ETF

VGT

Vanguard Information...

SMH

VanEck Semiconductor ETF

XLK

Technology Select Sector SPDR...

VTI

Vanguard Total Stock Market...

SOXX

iShares Semiconductor ETF

BLOK

Amplify Transformational Data...

META

Roundhill Ball Metaverse ETF

Loading Articles...
Help & Info
  • Contact Us
Tools
  • ETF Screener
  • ETF Analyzer
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Performance Visualizer
  • ETF Database Model Portfolios
  • ETF Database Realtime Ratings
  • ETF Database Pro
More Tools
  • ETF Launch Center
  • Financial Advisor & RIA Center
  • ETF Database RSS Feed
Explore ETFs
  • ETF News
  • ETF Picks of the Month
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Best ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Legal
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.
Follow ETF Database
Follow ETF Database

Advertisement

Is Your Portfolio Positioned With Enough Global Exposure?

ETF Education Channel

How to Allocate Commodities in Portfolios

Tom LydonApr 26, 2022
2022-04-26

A long-running debate in asset allocation circles is how much of a portfolio an investor should...

Core Strategies Channel

Why ETFs Experience Limit Up/Down Protections

Karrie GordonMay 13, 2022
2022-05-13

In a digital age where information moves in milliseconds and millions of participants can transact...

}
X