As Elections Near, Consider Volatility Reduction Strategies | ETF Trends

The combination of rising coronavirus case counts in some parts of the world and a highly contentious presidential election looming here in the U.S. could set the stage for elevated market volatility heading into year-end, but advisors can temper turbulence with proper positioning via model portfolios.

Consider the Volatility Management Model Portfolio, which is part of WisdomTree’s broader universe of Modern Alpha model portfolios.

The Volatility Management Model Portfolio is “designed for investors who seek to incorporate alternative investments into a traditional portfolio using ETFs. Volatility Management is a reference to including non-traditional assets in addition to stocks and bonds in order to reduce overall portfolio volatility as measured by annual standard deviation. This model portfolio was previously known as the Alternatives Model Portfolio,” according to WisdomTree.

Preparing for a Wild Few Months

While the U.S. presidential election is still three months away, some are already prepping for heightened volatility associated with prolonged political uncertainty, the Wall Street Journal reports.

For instance, some are speculating that President Donald Trump could try to delay the election or disrupt mail-in voting, along with a chance of an unclear result for weeks after polls close.

It doesn’t matter who wins the presidential election come November, investors could be in for a wild ride of volatility. If September’s market swings were akin to an aftershock, then November could bring the big one, according to Wells Fargo Securities’ head of macro strategy Michael Schumacher.

One of the bedrocks of the Volatility Management Model Portfolio is the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEArca: PUTW).

PUTW can help investors generate income by selling volatility through writing options. PUTW includes one- and three-month Treasury bills and sells or “writes” one-month, at-the-money, S&P 500 Index puts.

Investors can utilize a put-write ETF strategy to generate attractive returns in a slightly downward trending or sideways market.

Put writing has been used by many market participants for decades as a way to potentially increase the yield and smooth out the ride of equity returns over various market cycles.

Put options allow a buyer the right, but not the obligation, to sell a specific quantity of a security at a set strike price, or exercise price, on or before an agreed expiration date. The put option buyer would pay the seller a premium for this right to sell. The put write strategy would generate income through these premiums.

Selling puts can reward investors in a stagnant stock market as the trader would collect premiums, or yields if the strike price remains below the current market price of a security.

For more on how to implement model portfolios, visit our Model Portfolio Channel.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.