Market fears of a new COVID-19 variant dumped a large bucket of volatility all over the stock market indexes, making risk management strategies a must.

“Soaring volatility on Wall Street on concerns over a new coronavirus variant identified in South Africa sent investors scrambling into defensive options plays on Friday and boosted the Wall Street’s most widely followed fear gauge to a more than two-month high,” Reuters notes.

“The Cboe Volatility Index rose 8.37 points to 26.95, its highest since Sept. 20, as the S&P 500 index fell 1.9% with travel, bank and commodity-linked stocks bearing the brunt of the selloff triggered by the discovery of a new and possibly vaccine-resistant coronavirus variant,” Reuters adds.

One way to stave off the volatility is to re-allocate exposure from equities to bonds. When a risk-off sentiment takes over, investors can shift to bonds, and vice versa when a risk-on sentiment returns.

Seems like a sound strategy, but investors may not have the time or, more importantly, the expertise to re-allocate their capital with various positions. One way to handle this is to use an active exchange traded fund (ETF) that does all the work, but the average 0.69% expense ratio might be off-putting.

Mitigate Risk With One ETF

Another way to mitigate risk at a cost-effective 0.39% expense ratio is to use the Global X Adaptive U.S. Risk Management ETF (ONOF), which seeks investment results that correspond generally to the price and yield performance of the Adaptive Wealth Strategies U.S. Risk Management Index. The fund invests at least 80% of its total assets in the securities of the index or in investments that have economic characteristics that are substantially identical to the economic characteristics of such component securities, either individually or in the aggregate.

The index is designed to dynamically allocate between either 100% exposure to the Solactive GBS United States 500 Index TR or 100% exposure to a portfolio of U.S. Treasuries with 1–3 years remaining to maturity.

ONOF gives investors:

  • Risk management: ONOF is designed to maintain exposure to the equity markets when the trending environment is positive, and then move to a risk-off position when that trend reverses.
  • A four signal approach: ONOF incorporates moving average, convergence/divergence (MACD), drawdown, and volatility as indicators to shift between equity and fixed income exposure, with each receiving an equal vote in the strategy.
  • Less downside risk: The strategy seeks to mitigate the extent of drawdowns while remaining invested in equities as much as possible.

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