As the Federal Reserve eyes a tighter monetary policy with higher rates ahead, exchange traded fund investors do not have to rely solely on tradition investment options to hedge against rising rate risks.
For example, the actively managed Reality Shares DIVS ETF (NYSEArca: DIVY) is a good alternative for a conservative fixed-income position in a changing market environment. DIVY tries to provide exposure to the growth rate of expected dividends and looks to deliver long-term capital appreciation rather than income and yield through options contracts and dividend swaps.
“Investors should look for better fixed-income alternatives in today’s rising rate environment. Short-term bond funds aren’t the only or best answer in today’s market, and equities have been showing signs of volatility… so where else can investors turn?” Eric Ervin, Founder & CEO of RealityShares, said in an email.
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“Unlike more traditional products, the Reality Shares DIVS ETF (NYSE Arca: DIVY) isolates and invests in the dividend growth rate of large cap U.S. companies – not the appreciation of the underlying stock price – and thus, shields investors from stock volatility,” Ervin added.
DIVY is not so much a stock alternative as it is a bond alternative. Through its targeted dividend growth strategy, DIVY may produce low-volatility and low market correlation that helps stabilize an investment portfolio. For instance, the ETF has shown a -0.09 correlation to the Barclays U.S. Aggregate Bond Index, a 0.40 correlation to the HFRX Global Hedge Fund Index and a 0.29 correlation to the S&P 500 Index, reflecting an almost neutral correlation to U.S. bonds and slight positive correlation to U.S. stocks.
Furthermore, Reality Shares DIVS ETF has also exhibited smaller swings in a time of heightened volatility and even outperformed the broader U.S. markets this year. Year-to-date, DIVY rose 3.4%, compared to the 0.1% dip in the S&P 500. The Reality Shares DIVS ETF portfolio has also produced historically lower volatility than the S&P 500. According to Bloomberg data from the end of 2014 through March 2018, DIVY’s net asset value has shown a standard deviation of 4.2%, compared to the S&P 500’s 12.5%.
For more information on alternative investments, visit our alternatives category.