Some strategies claim to be volatility reducers, but many leave investors disappointed or too exposed in rocky market environments.
One way of quashing volatility is with a model portfolio dedicated explicitly to that objective. Enter 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.
Keeping Volatility in Check
A prime avenue for limiting volatility in a portfolio is to reduce correlations to traditional asset classes, an objective ETFs have made easier. Consider the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEArca: PUTW).
PUTW includes one- and three-month Treasury bills and sells or “writes” one-month, at-the-money, S&P 500 Index puts. PUTW is one of the components in the Volatility Management Model Portfolio.
The PutWrite ETF will try to reflect the performance of the CBOE S&P 500 PutWrite Index, which implements a put write strategy on the S&P 500 Index. PUTW includes one- and three-month Treasury bills and sells or “writes” one-month, at-the-money, S&P 500 Index puts.
Another risk reduction idea featured in this WisdomTree model portfolio is the AGFiQ U.S. Market Neutral Anti-Beta Fund (BTAL).
The benefits will emphasize how BTAL is a risk-diversifier, so with after-market corrections, because of those protections, an investor will not have gone down as much. Less risk ends up benefiting the portfolio, and the investor will have more wealth as well. Additionally, investors will be able to build more wealth, going forward, because they’ll be starting from a higher level.
BTAL tracks an equal-weighted index that takes long positions in low beta US stocks offset by short positions in high beta US stocks. It provides consistent exposure to the anti-beta factor by investing in the underlying index which reconstitutes and rebalances monthly in equal dollar amounts in equally weighted long low beta positions and equally weighted short high beta positions within each sector.
BTAL is considered an alternative investment and as such can act as an important portfolio diversifier and an avenue for reducing correlations. While not zero, BTAL’s correlations to broader benchmarks, such as the S&P 500, are low relative to pure beta instruments.
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.