“Bear market territory” are words that investors are seeing these days. With that kind of vernacular circulating in the financial markets, it’s necessary to add a hedging strategy to any portfolio.
The latest market movements make an even stronger case for adding strategies that can help with easing volatility, especially in the form of sell-off pressures. At the same time, when market stress eases, capturing upside is also a must.
Right now, however, getting downside protection is almost imperative. The latest geopolitical news regarding Russia’s invasion of Ukraine is just one of the reasons.
“Investors should expect strong sanctions imposed on Russia, which will slow growth and leave upward pressure on commodity prices,” wrote Dennis DeBusschere of 22V Research, according to a CNBC report. “How long this crisis takes to unfold will determine how much inflation, financial conditions, and growth will be impacted. Short-term, a flight to safety means Treasury yields, rate hike expectations and risk assets are sharply lower.”
Hedging With 1 ETF
Investors can get hedging strategies with exposure to the broad market S&P 500 using one ETF: the Global X Funds – Global X S&P 500 Tail Risk ETF (XTR ). The fund seeks to provide investment results that correspond generally to the price and yield performance, before fees and expenses, of the Cboe S&P 500 Tail Risk Index.
XTR employs a protective put strategy for investors seeking to buffer against market sell-offs. XTR seeks to achieve this outcome by owning the stocks in the S&P 500 Index, coupled with buying 10% out-of-the-money put options on the S&P 500 Index.
Overall, XTR offers:
- Growth potential: XTR offers uncapped exposure to the growth potential of the stocks in the S&P 500 Index.
- Managed downside risk: By buying protective puts, XTR seeks to mitigate significant sell-offs of greater than approximately -10% from the purchase of the put to the options’ expiration in three months.
- Efficient options execution: XTR buys put options on the S&P 500, saving investors the time and potential expense of doing so individually.
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