ETFdb Logo
ETFdb Logo
  • ETF Database
  • Channels
    • Active ETF
    • Beyond Basic Beta
    • China Insights
    • Climate Insights
    • Commodities
    • Core Strategies
    • Crypto
    • Direct Indexing
    • Disruptive Technology
    • Energy Infrastructure
    • ETF Building Blocks
    • ETF Education
    • ETF Strategist
    • Financial Literacy
    • Fixed Income
    • Gold/Silver/Critical Minerals
    • Innovative ETFs
    • Institutional Income Strategies
    • Leveraged & Inverse
    • Managed Futures
    • Market Insights
    • Modern Alpha
    • Multifactor
    • Night Effect
    • Portfolio Strategies
    • Responsible Investing
    • Retirement Income
    • Richard Bernstein Advisors
    • Tax Efficient Income
  • 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
  • Research
    • 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 of the Week Podcast
    • ETF Prime Podcast
    • Video
  • Company
    • About VettaFi
    • Get VettaFi’ed
  • PRO
    • Pro Content
    • Pro Tools
    • Advanced
    • FAQ
    • Pricing
    • Free Sign Up
    • Login
  1. Hedge Your Portfolio with ETFs
News
Share

Hedge Your Portfolio with ETFs

Justin KuepperSep 04, 2015
2015-09-04

The stock market has been extremely volatile in August and there are no signs of the volatility moderating in September. In addition to concerns of an interest rate hike, there is a high level of uncertainty regarding the extent of China’s economic decline, potential problems brewing in emerging markets, and ongoing currency devaluations around the world. Stock valuations may also be historically lofty judging by measures like the Cyclically-Adjusted P/E (“CAPE”) ratio.

Investors looking to hedge against this volatility and/or the potential for decline may want to consider exchange-traded funds (“ETFs”) as options to offset long stock positions.

Volatility ETFs

The iPath S&P 500 VIX Short Term Futures ETN (VXX) has soared more than 80% over the past 30 days, although it remains down roughly 13% over the past year. Using CBOE Volatility Index® futures as underlying instruments, the ETN increases in value as the market becomes more volatile and loses value when the market becomes less volatile. Investors that want to hedge against volatility – although not direction – may want to take a closer look.


Content continues below advertisement

iPath S&P 500 VIX Short Term Future ETN
Figure 1 – iPath S&P 500 VIX Short Term Future ETN – Source: YCharts

Other volatility ETFs and ETNs include:

  • VIX Short-Term Futures ETF (VIXY A)
  • SYP 500 VIX Mid-Term Futures ETN (VXZ A-)
  • VIX Mid-Term Futures ETF (VIXM A+)

Short S&P 500 ETFs

The ProShares Short S&P 500 ETF (SH A+) has risen more than 7.75% over the past 30 days, although it’s only 3.6% higher since the beginning of the year. Using both short-selling techniques and derivatives, the ETF gains in value as the S&P 500 declines in value on a one-to-one basis. Investors that are concerned that the market may fall over the coming months may want to purchase the ETF as a hedge against a decline.

ProShares Short S&P 500 ETF
Figure 2 – ProShares Short S&P 500 ETF – Source: YCharts

Other short equity ETFs and ETNs include:

ProShares Short Russell 2000 (RWM A-)
ProShares Short Dow 30 (DOG A)
ProShares Short QQQ (PSQ A)

Sector Rotation ETFs

The Barclays ETN Shiller Cape ETF (CAPE) has fallen 6.8% over the past month and 3.26% over the past year, but the cyclically-adjusted price-earnings ratio strategy could equate to better performance in troubled markets moving forward. By purchasing sectors trading at the biggest discounts, the ETF attempts to capitalize on sector rotation dynamics over the long-term, although the fund is thinly traded with less than $30 million in assets under management.

S&P 500 CAPE Ratio Over Time
Figure 3 – S&P 500 CAPE Ratio Over Time – Source: YCharts

Investors looking to implement the same type of strategy can do so using more-liquid ETFs targeting specific sectors, such as those offered by iShares. After identifying the market sectors trading at the biggest discount, investors can purchase undervalued ETFs and perhaps short-sell or buy put options on overvalued ETFs to capitalize on a return to normalcy. Long-term data has shown that these strategies may be effective, but of course, are no guarantee for the future.

The Bottom Line

There are many reasons for investors to be nervous about the market in September. While the market may decline, there are many ETFs that provide an opportunity to profit in terms of both volatility and direction. Investors may want to consider these ETFs as an option to hedge an otherwise long portfolio against decline, although they should carefully consider the risks involved with short-selling or volatility bets.

» Popular Pages

  • Tickers
  • Articles

Jun 02

A Cash Alternatives ETF With a Distribution Yield Over 6%

Jun 02

Treasury Yields Snapshot: June 2

Jun 02

Main Management Market Note: June 2, 2023

Jun 02

China’s EV Market Recovers, Keep an Eye on KARS

Jun 02

A Debt Limit Deal Is Made, Target Treasuries of Any Duration

Jun 02

This Week in ETFs: Only 2 Launches, Many Closures

Jun 02

As Summer Nears, Eye Travel Stocks in JRNY

Jun 02

NYSE’s ETF Leaders: Northern Trust’s Michael Natale

Jun 02

Seize Market Gains & Optimize Dividends With KVLE

Jun 02

VettaFi Voices: Active or Passive for ESG ETFs?

QQQ

Invesco QQQ Trust

SPY

SPDR S&P 500 ETF Trust

JEPI

JPMorgan Equity Premium...

VTI

Vanguard Total Stock Market...

VOO

Vanguard S&P 500 ETF

VGT

Vanguard Information...

TLT

iShares 20+ Year Treasury...

BND

Vanguard Total Bond Market...

XLP

Consumer Staples Select...

BOTZ

Global X Robotics &...


Content continues below advertisement

Loading Articles...
Our Sites
  • VettaFi
  • Advisor Perspectives
  • ETF Trends
Tools
  • ETF Screener
  • Mutual Fund to ETF Converter
  • Head-To-Head ETF Comparison
  • ETF Country Exposure Tool
  • ETF Stock Exposure Tool
  • ETF Database Pro
More Tools
  • Financial Advisor & RIA Center
Explore ETFs
  • ETF News
  • ETF Category Reports
  • Premium Articles
  • Alphabetical Listing of ETFs
  • Browse ETFs by ETF Database Category
  • Browse ETFs by Index
  • Browse ETFs by Issuer
  • Compare ETFs
Information
  • Contact Us
  • Terms of Use and Privacy Policy
  • © 2023 VettaFi LLC. All rights reserved.

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