The U.S. Federal Reserve’s interest rate policy decisions always make for a volatile week on Wall Street, but more investors are now looking to mute the market movements with low-volatility funds.
The move is warranted, given how the CBOE Volatility Index (VIX) has been trending higher for most of the year. The index was up over 100% early in the year and spiked the past week again, reaching a year-to-date rise of about 74%.
As such, more investors are looking to low volatility funds to quiet the market noise.
“Investors are flocking to funds that tout their ability to shelter investors from major market swings even though they didn’t perform exactly as advertised during the height of the Covid-19 pandemic,” a Wall Street Journal article said.
“Roughly $6.5 billion has poured into low-volatility mutual and exchange-traded funds this year, putting the funds on track for their first annual inflows since 2019, according to Morningstar Direct,” the article added. “Low-volatility funds promise a smoother market ride by holding stocks with the smallest one-day swings—higher or lower. That bias often lends itself to shares of utilities, consumer goods, and real-estate companies that tend to be less sensitive to economic booms and busts.”
Cost-Effective Risk Mitigation With One ETF
One way to mitigate risk and limit volatility 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 generally correspond to the price and yield performance of the Adaptive Wealth Strategies U.S. Risk Management Index. The fund aims to provide a risk management solution by employing four technical indicators to dictate whether the Fund is participating in the U.S. equity markets or in a defensive stance in short term treasuries.
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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