As market conditions change, investors can utilize exchange traded funds that track alternative investment strategies to hedge risks or capitalize on potential opportunities.
On the recent webcast, Building Tactical Strategies to Combat Today’s Market Challenges, Mike Eschmann, managing director and co-head of capital markets & institutional strategy team for Direxion Investments, warned that with the equities markets near record highs and interest rates hovering near all-time lows, investors should be prepared their portfolios for sudden shifts by reducing risks.
For instance, Eschmann argues that managing duration – a measure of sensitivity of the price of a bond fund’s price to changes in interest rates – is very important as we face a rising interest rate environment. Bond funds with longer durations will exhibit a greater sensitivity to changes in interest rates. Looking at Treasury funds, Eschmann pointed out that if yields rose 1%, 5-year Treasuries could see returns diminish 4.67%, 10-year Treasuries could decline 8.49% and 30-year Treasuries could plunge 18.38%.
Consequently, investors can help diminish rate risk with an inverse leveraged Treasury bond ETF, such as the Direxion Daily 20-Year Treasury Bear 3X ETF (NYSEArca: TMV), which takes the -300% daily return of long-term Treasury bonds. Specifically, Eschmann points out that a 5% allocation to TMV reduces duration in half when investing in the Barclays AGG Index, Barclays 7-10 year Treasury Index and Morningstar International Bond. [Rate Hike Jitters Have Investors Fleeing Bond ETFs]
Matthew Tuttle, CEO & CIO of Tuttle Tactical Management, the manager behind the Tuttle Tactical Management U.S. Core Exchange-Traded-Fund (NasdaqGS: TUTT), also believes that leveraged and inverse ETFs can be used as a tactical allocation tool to better manage market exposure. For example, TUTT currently includes a position in Direxion Daily S&P 500 Bull 3X Shares (NYSEArca: SPXL).