As if high interest rates and inflation aren’t enough, investors today are also faced with geopolitical risk. This can add a large dose of volatility to the capital markets. But that can be mitigated with the right strategy, or even one fund.
Risk mitigation is even more imperative than ever given current macroeconomic conditions. On top of that, other forces beyond an investor’s control exist beyond domestic borders in the form of geopolitical risk.
“Rarely since the 1970s has the global economy seemed so turbulent. The march of globalisation has slowed,” a Financial Times article said. “The dual shocks of the Covid-19 pandemic and Russia’s invasion of Ukraine have muddied monetary policy and upset energy markets and supply chains. Economic nationalism, U.S.-China tensions, and fragmentation have taken root.”
Outside forces that can move markets also include climate change. More nations shifting from fossil fuels to alternative energy sources as a means to lowering their carbon footprint can also add an additional dose of volatility.
“Governments are taking a bigger role in economic management, particularly faced with the urgency of the climate transition,” the FT article added. “The tragic return of conflict to the Middle East only underscores the pattern of rising geopolitical risk.”
Smooth Out Volatility With This Low Volatility ETF
To mitigate against wild market fluctuations, investors can employ a wide variety of strategies, from adding more safe haven assets or resorting to more complex trading methodologies, like options, to offset the downside. However, there’s an easier solution that’s available in one exchange-traded fund: the American Century Low Volatility ETF (LVOL).
Due to its active management, LVOL offers dynamic exposure at a low-cost expense ratio of 0.29%. Active management allows for changes to fund holdings on the fly, allowing for market flexibility when volatility strikes.
As far as its holdings go, the fund screens for asymmetric, or downside, volatility and invests in companies with strong, steady growth. Furthermore, its focus is on strong fundamentals, wherein companies exhibit strong balance sheets with sustainable profit potential.
Its rebalancing strategy also gives LVOL pliability in the market when equities prices fluctuate wildly during heavy volatility. Like the American Century Focused Large Cap Value ETF (FLV), that flexibility is also attributed to its active management component.
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