The complacent market belies the uncertain conditions ahead. As markets see gathering storm clouds ahead, investors should look to some exchange traded fund strategies to limit portfolio volatility.
“Market volatility is unusually low, and we see it moving higher as the Nov. 8 U.S. presidential election approaches,” BlackRock strategists, led by Richard Turnill, said in a research note.
The CBOE Volatility Index, or VIX, is at the 11.7 level and is hovering around its lowest point this year.
While the stock market may react to more macroeconomic factors and corporate earnings, BlackRock argued that volatility will pick up ahead of the U.S. elections. The equities market is notorious for its dislike of anything uncertain, and with unpopular candidates up to bat, we may witnessed wider swings as we head toward the polls.
Moreover, even though Democratic presidential nominee Hillary Clinton is currently leading, a Republican Donald Trump upset could cause even more volatile swings.
“We could see the uncertainty surrounding his future policies putting downward pressure on risk assets such as equities,” BlackRock said. “It could also trigger a near-term flight to U.S. Treasuries.”[related_stories]
However, the BlackRock strategists reined in expectations for a Treasuries bounce as both candidates have campaigned on increased fiscal spending, which would add more debt or greater Treasury issuance and higher yields.
Consequently, with this more volatile outlook, investors may turn to low-volatility ETF strategies. For instance, the iShares Edge MSCI Min Vol USA ETF (NYSEArca: USMV) selects stocks based on variances and correlations, along with other risk factors. Additionally, the competing PowerShares S&P 500 Low Volatility Portfolio (NYSEArca: SPLV) tracks the 100 least volatile stocks on the S&P 500.
Additionally, traders could also look to VIX-related ETPs as a means of hedging market risks, including the iPath S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX), ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY) and leveraged ProShares Ultra VIX Short-Term Futures (NYSEArca: UVXY).
The VIX, or so-called fear index, is a widely observed indicator for investor sentiment in the stock market and measures the expected or implied volatility of large-cap stock options traded on the S&P 500 index. Exchange traded products that track VIX futures allow investors to profit during rising volatility or hedge against short-term turns.
For more information on market risks, visit our volatility category.
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.