While investors may be questioning their equity exposure after the recent bout of volatility, U.S. stock ETFs may still find support from strong fundamentals.
Sam Stovall, Chief Investment Strategist of U.S. Equity Strategy at CFRA, pointed out in a recent research note that since October, the S&P 500 has witnessed a 40% surge in average intra-day volatility, compared to the first nine months of the year.
The rolling 12-month count of daily moves greater than 1% is currently 47% below its average since 2000 and 22% lower than the average since 1950. Despite the volatility, this year has been relatively benign, historically speaking.
Nevertheless, October’s reputation for being a volatile month is justified as it has experienced the greatest percentage of days in which the S&P 500 rose or fell by 1% or more since 1950 at 10.3%, compared to January, the next highest month, experienced a closer-to-normal average of 8.8%.
Stovall, though, warned that the full decline might not be over. There were 26 calendar years since WWII in which the S&P 500 continued to fall into at least two round-trip sell-offs exceeding 5%, with the second deeper than the first in more than two out of three times.
Inverse ETF options
Consequently, investors who are seeking a hedge against further weakness in the markets may turn to alternative ETF strategies. For those who were wary of a potential pullback in the S&P 500 index, there are a number of bearish or inverse ETF options with varying levels of leveraged exposure to capitalize off a weakening S&P 500.
For example, the ProShares Short S&P500 (NYSEArca: SH) takes a simple inverse or -100% daily performance of the S&P 500 index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500.
“The good news is that we don’t think it will result in a new bear market, since our fundamental outlook remains firm,” Stovall said.
Specifically, Stovall pointed out that S&P Capital IQ projected third quarter 2018 earnings to be 21.3% year-over-year higher for the S&P 500. Ten of 11 sectors are expected to post increases with double-digit gains led by energy, financials and materials.
Year-to-date, the Financial Select Sector SPDR (NYSEArca: XLF) dipped 2.0%, Energy Select Sector SPDR (NYSEArca: XLE) rose 2.5% and Materials Select Sector SPDR (NYSEArca: XLB) declined 9.4%, compared to the S&P 500’s 6.6% advance.
For more information on the market sectors, visit our sector ETFs category.