While the major stock market indexes have steadied in the past month, volatility is far from over. With inflation fears giving way to recession fears, market activity could be amplified once again.
The markets are currently in the midst of a summer rally, but eyes continue to be on the Federal Reserve and how it will approach interest rate policy. For now, it appears that further tightening could be on the way, but the big question is whether the tightening will be to the detriment of economic growth. As such, the recession narrative has been increasing as of late.
“Stocks are on the hunt for firm direction in the wake of a waning summer rally, with the Federal Reserve unlikely to pause rate hikes until it sees a major improvement in a key inflation gauge, according to UBS,” a Markets Insider report noted.
Optimists are hoping that the Fed can guide the economic to a “soft landing” as opposed to a recession. Until then, market volatility is to be expected, giving investors reason to hedge against further stock market pressure.
“We expect equity markets to remain volatile as investor sentiment oscillates between hopes that the Fed will succeed in steering the US economy to a ‘soft landing’ and fears that it will not,” said Mark Haefele, chief investment officer at UBS Global Wealth Management.
A High-Volatility Solution
One option to consider is an exchange traded fund (ETF) that accomplishes the objective of muting volatility when it strikes. Consider the American Century Low Volatility ETF (LVOL), which gives investors exposure to active management, meaning that portfolio managers can check the pulse of the markets and get in or out of positions depending on how the market is behaving.
This dynamic exposure comes at a low-cost expense ratio of 0.29%. The fund screens for asymmetric, or downside, volatility and invests in companies with strong, steady growth.
Key features of the fund as presented on the product website:
- Emphasizes strong fundamentals to limit potential risk of speculative companies with questionable profits.
- Expands risk measures beyond volatility to capture other downside and balance sheet risks.
- Focuses on volatility at the portfolio level as well as the individual stock level.
- Uses a rebalancing strategy that actively responds to changing market conditions.
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