When accounting for reinvested dividends, the S&P 500 is up 31.7% this year. The benchmark U.S. index has only sporadically traded below its 50-day simple moving average on a few occasions and not once has it closed below its 200-day line in 2013.
In other words, the 2013 rally in U.S. equities has been one short on legitimate corrections and that has the chorus calling for such a correction in 2014 growing louder. While expectations are in place that U.S. stocks will enjoy another strong year in 2014, few experts expect the S&P 500 will repeat 2013’s showing and some are forecasting a correction of up to 10%.
Investors can survive and thrive during a market pullback with exchange traded funds and thanks to some newer offerings, correction survival does not mean having to make a inverse, bearish bet.
Take the example of the Horizons S&P 500 Covered Call ETF (NYSEArca: HSPX), which not only helps investors damp volatility, but generate income in the process.[Covered Call ETFs Generate Income]
In sideways, bear or even modest bull markets, covered call ETFs such as HSPX can work in investors’ favor. By utilizing a covered call strategy, an investor who owns a stock sells call options, and collects the income from the premiums paid by the buyer of the option. Specifically, the underlying index utilizes an “out-of-the-money” covered call strategy. The out-of-the-money call option will take a strike price higher than the current market price of the underlying security. [Boost Portfolio Income With Covered Call ETFs]
HSPX also stacks up favorably against low volatility ETFs and has a new sector equivalent in the form of the Horizons Financial Select Sector Covered Call ETF (NYSEArca: HFIN).
Another credible pullback play is the PowerShares S&P 500 Downside Hedged Portfolio (NYSEArca: PHDG), which debuted just over a year ago and now has $112.3 million in assets under management.
PHDG’s underlying index, the S&P 500 Dynamic VEQTOR Index, has sharply outperformed the HFRX Global Hedge Fund Index this year and over the past 12 and 36 months, according to issuer data. The ETF charges just 0.39% per year, a small expense ratio by the standards of actively managed funds. [ETFs for Downside Protection]
PHDG holds derivatives along with equities with about 77% of the ETF’s equity allocation devoted to large-cap growth and value names. Top-10 holdings include Apple (NasdaqGM: AAPL) and Exxon Mobil (NYSE: XOM). PHDG is up 10% this year.
PowerShares S&P 500 Downside Hedged Portfolio
ETF Trends editorial team contributed to this post. Tom Lydon’s clients own shares of Apple.