Downside risk is hard for investors to protect themselves from, and ETFs can help alleviate some of this hardship. ETFs are treated like a single stock, so the risks involved with investing with these entail some of the risks as a single stock would.
But the strategies that can protect you in a down market are explained by Hans Wagnor on Investopedia:
- Know When to Sell Your ETF. Besides having a strategy and sticking to it, there are other indicators that are saying it’s time to get out. Reasons to get out include: your risk tolerance, stop orders for portfolio protection, cash at hand is needed and portfolio re-balancing. Likewise, when your expectations just aren’t being met, it is time to move on.
- Asset Allocation. Strategies that involve asset allocation are made to protect portfolios from negative movement. Strategies that ETF help to fulfill are sector exposure, filling a void within a portfolio, over-weighting or under-weighting a portfolio to reduce exposure to downside risk.
- Sector Rotation. By following sector rotation through business cycles, you can protect yourself before the high or low performance. The business cycle is a long term change in patterns in gross domestic product. The four basic changes are expansion, prosperity, contraction and recession.
- Hedging. A hedge is a position designed to mitigate risk that bets for or against an expected future trend or event. Hedges are particularly useful if an investor is facing a down market. Hedges do not make money, they limit risk. ETFs that short an index or a sector give investors new ways to employ hedging strategies, and options on ETFs give investors another way to hedge their positions.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.