Consequently, Munro advises investors to build diversified portfolios by measuring risk exposures and correlations between assets. For instance, investors can diminish equities risk by going short U.S. small-cap stocks while being long U.S. large-caps, which could help investors garner a positive return during a market sell-off since small-caps typically underperform during bearish conditions.
Traders can hedge against further dips in small-caps with inverse and leveraged ETF options. For instance, the ProShares Short Russell 2000 ETF (NYSEArca: RWM) reflects the -1x or -100% daily performance of the Russell 2000 Index and the ProShares Short Small Cap 600 (NYSEArca: SBB) takes the -100% of the S&P Small Cap 600.
Additionally, for the more aggressive trader, the ProShares UltraShort Russell 2000 ETF (NYSEArca: TWM) tracks the -2x or -200% daily performance of the Russell 2000. The Direxion Daily Small Cap Bear 3X Shares (NYSEArca: TZA) tracks the -3x or -300% daily performance of the Russell 2000. Lastly, the ProShares UltraPro Short Russell 2000 ETF (NYSEArca: SRTY) also takes the -300% performance of the Russell 2000.
In the currently weak oil market conditions, Munro also suggests taking positions in currencies of oil-importing countries as opposed to those of oil exporters. Commodity importers or countries with more stable currencies could benefit from the cheaper raw materials, including South Korea, Taiwan, the Philippines, eastern European countries, Turkey and South Africa. [Falling Commodity Prices a Boon for Some EM ETFs]
For more information on investing in ETFs, visit our ETF 101 category.
Max Chen contributed to this article.