ETF Trends
ETF Trends

As the equities rally grows long in the tooth, more seasoned financial advisors may think about hedging market risks through leveraged and inverse ETFs to navigate more volatile market conditions.

On the upcoming webcast, ETF Trading Strategies for Volatile Markets, Mike Eschmann, Managing Director and Co-Head of Capital Markets & Institutional Strategy Team for Direxion Investments, Jonathan Chatfield, Chief Portfolio Manager for Probabilities Fund Management, and Biff Robillard, President of Bannerstone Capital Management, discuss hedging strategies that advisors can implement through leveraged and inverse ETFs during choppy markets.

For starters, people should understand that these leveraged/inverse, or geared, products try to generate the multiple returns of a given market by taking on additional exposure through derivatives instruments. Most leveraged ETFs are designed to produce double or triple the performance of the underlying market on a daily basis. Consequently, when investors look at the long-term performance of a typical leveraged ETF, people could notice that a fund may not perfectly reflect their intended strategies.

Due to compounding, the leveraged and inverse ETFs may diverge from their long-term intended strategies. A strong bull market without long interruptions and relative lack of volatility can help maintain positive gains in the leveraged ETF. Since the ETFs rebalance on a daily basis, the compounding effect benefits leveraged ETFs in a upward-trending market. However, in times of increased volatility, leveraged ETF returns can fall behind their intended 2x or 3x strategies.

Nevertheless, more sophisticated advisors and investors can utilize inverse ETF strategies to hedge against potential market risks to diminish a portfolio hit during a sudden pullback. Alternatively, leveraged long ETFs can provide a great opportunity to capitalize off a quick market rebound, but investors would have to be comfortable with the add risk of taking a leveraged position.

For instance, looking ahead, fixed-income investors may hedge against the Federal Reserve interest rate hike through inverse or short Treasury bond ETFs, such as the Direxion Daily 7-10 Year Treasury Bear 1x Shares (NYSEArca: TYNS) or Direxion Daily 20+ Year Treasury Bear 1x Shares (NYSEArca: TYBS). Additionally, investors may also hedge against any further weakness in the equities market through broad inverse stock ETFs, such as Direxion Daily Total Market Bear 1x Shares (NYSEArca: TOTS). [Some Leveraged Energy Equity ETFs Merit Examination]

Financial advisors who are interested in learning more about geared ETFs can register for the Wednesday, August 5 webcast here.

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.