Market volatility has a profound impact on investor portfolios. In addition to potential losses, volatility can make you second-guess decisions and engage in overtrading. The good news is that there are many strategies that can help protect your portfolio, including a number of strategies using exchange-traded funds (ETFs). Investors may want to consider these strategies in order to avoid any potential issues during troubled times.
In this article, we will take a look at some ETF strategies designed to manage volatility during troubled times without sacrificing gains during calm times.
Minimum Volatility ETFs
Minimum volatility—or “min vol”—ETFs track indexes that have a lower risk than traditional benchmark indexes. For instance, the MSCI USA Minimum Volatility Index tracks equities in the top 85% by market capitalization on listed exchanges and weights the securities based on their volatility and other risk factors. The index underlies the popular iShares Edge MSCI Min Vol USA ETF (USMV ) that has over $13 billion in assets.
While these minimum volatility ETFs are effective at minimizing volatility, the weighting of these funds may differ from traditional broad market indexed ETFs (see table below). Investors may want to be cognizant of these differences when investing in minimum volatility ETFs in order to avoid being unknowingly overweight in certain sectors. For instance, an investor may want to be equal weight in technology, but a Min Vol ETF could be underweight.
| Sector | Benchmark (SPY) | Min Vol (USMV) |
|---|---|---|
| Health Care | 15% | 20% |
| Consumer Defensive | 19% | 15% |
| Technology | 17% | 9% |
| Energy | 7% | 2% |
Some other popular minimum volatility ETFs include:
Hedging with VIX ETFs
Purchasing low-volatility equities is one option for reducing a portfolio’s volatility, but the strategy leaves an investor potentially underweight in certain sectors. Another popular approach is to maintain a traditional portfolio and hedge against volatility using the CBOE Volatility Index – or VIX. Using this strategy, investors are offsetting any losses from volatility with profits generated from VIX-related ETFs.
Alternative ETFs in the Volatility Category:
| Type | Ticker | Expense Ratio | Assets | Avg. Daily Vol | YTD Return |
|---|---|---|---|---|---|
| Cheapest | (XVIX ) | 0.85% | $13.3M | 1,432 | 11.29% |
| Largest (AUM) | (VIXY ) | 0.85% | $276.4M | 3,557,145 | -28.66% |
| Most Liquid (Volume) | (VIXY ) | 0.85% | $276.4M | 3,557,145 | -28.66% |
| Top YTD Performer | (XVIX ) | 0.85% | $13.3M | 1,432 | 11.29% |
The iPath® S&P 500 VIX Short-Term Futures ETN (VXX ) is a great example of an ETF that rises when volatility is on the rise (see others above). Using VIX futures contracts, the ETF offers exposure to daily long rolling positions in the first and second month contracts. Investors can even purchase options on the VXX ETF instead of purchasing it outright as a cheaper insurance policy against rising volatility in the equity markets.
Some other popular VIX ETFs include:
Volatile markets can have a tremendous impact on investor portfolios. Fortunately, there are many ETF strategies that can be used to mitigate these risks over time. Minimum volatility ETFs can help avoid high-risk stocks, while VIX ETFs can help offset losses by profiting from rising volatility. Each of these strategies has its own benefits and drawbacks that investors should carefully consider before committing any capital.
The Bottom Line
Volatile markets can have a tremendous impact on investor portfolios. Fortunately, there are many ETF strategies that can be used to mitigate these risks over time. Minimum volatility ETFs can help avoid high-risk stocks, while VIX ETFs can help offset losses by profiting from rising volatility. Each of these strategies has its own benefits and drawbacks that investors should carefully consider before committing any capital.
