As volatility grips the markets, stock investors could turn to alternative investment strategies and ETFs to hedge against further downside risks.
“At present, we believe a more defensive positioning could be warranted as the current bull market enters its latter stages,” Gaurav Sinha, Asset Allocation Strategist for WisdomTree, said in a note.
Sinha argued that accelerating correlations not only act as a precursor for spikes in the CBOE Volatility Index or VIX, a widely observed gauge of market fear, but also pointed to potentially unstable swings in values of the VIX, which would reflect greater uncertainty for U.S. stocks.
In the current market environment, investors will have to face a number of potential risk catalysts. For example, we are entering a period of rising interest rates as the Federal Reserve tightens its monetary policy. Global central banks are also adjusting their balance sheets after the unprecedented post-financial-crisis quantitative easing policies. Additionally, lingering concerns over trade disputes between the U.S. and China continue to add to the uncertain outlook.
“In our view, none of these challenges are insurmountable for equity markets if earnings continue to grow. However, an alternative method of stock selection and volatility mitigation may become necessary,” Sinha added.