Alternative ETF Opportunities to Hedge Market Risks

During periods of market selling in traditional assets, these types of liquid alts can experience lower drawdowns or even positive returns, which may help buoy an investment portfolio during troubled times.

George Milling–Stanley, Head of Gold Investment Strategy at State Street Global Advisors, argued that gold has historically had lower correlation relative to major asset classes in the long-run, including a relatively flat correlation to the S&P 500 and slightly positive correlation to the Barclays U.S. Aggregate Bond Index over the past decade.

Moreover, Milling-Stanley pointed out gold offers other benefits, such as providing a hedge against currency depreciation and protection against inflation.

Investors can gain exposure to gold through physically backed commodity ETFs, like the SPDR Gold Shares (NYSEArca: GLD) and more recently launched SPDR Long Dollar Gold Trust (NYSEArca: GLDW), which tries to hedge currency risks associated with a strengthening U.S. dollar.

Traders can also turn to leveraged and inverse ETFs to hedge market risks.

Leveraged and inverse ETFs “magnify the returns of their benchmark on a daily basis,” Sylvia Jablonski, Capital Markets-Institutional Strategist and Managing Director at Direxion, said. They “allow investors to gain exposure without the need for full dollar-for-dollar investment.”

Since the leveraged and inverse ETFs rebalance on a daily basis, traders should be aware of the potential side effects of compounding if the investments are held over a longer period. Specifically, the investments may have a lower cumulative return than their benchmark in a volatile market, or they may outperform in a consistently bullish or bearish condition.

Jablonski argued that investors can look to something like the Direxion Daily Financial Bull 3X Shares (NYSEArca: FAS) and Direxion Daily Regional Banks 3x Bull Shares (NYSEArca: DPST) to capitalize on short-term opportunistic views on further strength in the financial sector, or utilize the Direxion Daily Financial Bear 3X Shares (NYSEArca: FAZ) and Direxion Daily Regional Banks 3x Bear Shares (NYSEArca: WDRW) to express short-term hedge of the opposite if your view is mean reversion.

The Direxion Daily S&P 500 Bull 3X Shares (NYSEArca: SPXL) and the Direxion Daily Small Cap Bull 3X Shares (NYSEArca: TNA) could help traders capture a rally in large- and small-caps we continue to see deregulation, favorable tax policies and potential mergers ahead, Jablonski  added.

Additionally, the Direxion Daily 20-Year Treasury Bear 3X (NYSEArca: TMV) can help traders express an inverse view on bonds or hedge duration in a rising interest rate environment.

Financial advisors who are interested in learning more about CFP/CIMA accredited panels on the online conference can watch the 2017 ETF Trends Virtual Summit on demand.