Alternative ETFs to Help with Risk Management | ETF Trends

As more look for ways to hedge against market volatility and better manage risks, investors can consider alternative exchange traded fund strategies to diversify their portfolios.

“A rising tide has floated all boats in the last ten years, and I think returns are going to be lower in the future now. So, I think it’s going to change the dimension of advice to more focused on risk management and managing for volatility. So, a lot of what we are thinking about doing from a product standpoint plugs right into that,” Rob Nestor, President, Direxion, said at the Inside ETFs conference.

For example, investors may look to bearish or inverse ETFs to hedge market risks. The Direxion Daily S&P 500 Bear 1X Shares ETF (SPDN) seeks investment returns of 100% the inverse of the performance of the S&P 500 Index for a single day. Relative to Direxion’s more highly leveraged 3X products, SPDN allows investors to tactically add a hedge while allowing more room for error if markets do not correct as expected. It is important to note that the fund should not be expected to provide 100% of the inverse of the benchmark’s cumulative returns for periods longer than one day. And investors should understand the risks associated with the use of shorting and are willing to monitor their portfolios frequently.

Investors can also consider relative weight strategies that can help manage risk in a portfolio. For example, the Direxion Russell Large Over Small Cap ETF (RWLS) and Direxion Russell Small Over Large Cap ETF (RWSL) allows investors to take a more focused approach on certain segments of the market.

The underlying indices for each Relative Weight ETF is built with a 150% long component and 50% short component, resulting in a net exposure of 100% of assets. Each ETF and its benchmark index has an oppositely-weighted counterpart. The ETFs provide relative outperformance if the long component outperforms the short component. The strategy implements the long side of the trade, and then also rewards an investor when a macro view is correct.

Each relative weight ETF helps investors capture both sides of their expressed view, with a risk profile similar to the broad underlying asset class. The products are built on Direxion’s core expertise of delivering sophisticated and precise exposure, whether views are short, intermediate, or long term.

Watch Rob Nestor Discuss Risk Management:

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