Back in the day, hedging your positions required sophisticated knowledge about options or do some form of pairs trading. Luckily, new products have been created over the last few years that have made hedging easier without having to open an options account. We’re currently in the second longest bull market in history. However, all good things eventually come to an end. When volatility finally enters the market, you want to be prepared and ready to hedge. Let’s take a look at some of the most popular ETNs and ETFs to hedge your portfolio and see what they are all about.
ETFs to hedge your portfolio
ProShares Ultra VIX Short-Term Futures (UVXY)
This ETF was created for investors and traders who are looking to profit off increased volatility in the S&P 500. It attempts to replicate the investment results, before fees and expenses, that compare to two times the daily performance of the S&P 500 VIX Short-Term Futures Index.
Generally, when markets experience a selloff volatility increases. If the overall markets are declining, getting long this product makes sense. However, if you look at the chart you’ll notice it is only good for very small durations. That in mind, it’s only suitable for day trades and possibly a couple days if markets are really volatile.
Keep in mind, this does not move with the VIX. Some traders think that this ETF is a substitute for the VIX, but if you read the prospectus it clearly states that it doesn’t track the performance of the CBOE Volatility Index. Now, if you’re a day trader and don’t have any positions, taking UVXY long is a way to get offensive during a market selloff.
ProShares UltraPro Short QQQ (SQQQ)
Investors and traders looking to profit or hedge from a sell-off in Nasdaq stocks may consider this exchange-traded product. It attempts to replicate the investment results, before fees and expenses, that compare to three times the daily performance of the NASDAQ-100 Index. If you long positions that concentrated Nasdaq names, taking SQQQ could be a viable hedge. If you read the fact sheet, it states that due to compounding of daily returns, returns over periods beyond one day will likely differ in amount and even direction from the target return over the same period. In other words, this ETF is most suitable for day trading or a couple days.
Direxion Daily Gold Miners Bear 3X ETF (DUST)
Those looking to profit or hedge against a decline in gold miners. It attempts to replicate the investment results of three times the inverse performance of the NYSE Arca Gold Miners Index.
If you have long positions in junior miners and consider them long term, instead of closing them out you could use this ETF to protect yourself. If you read the fact sheet, they clearly state that DUST attempts to replicate the inverse return of its benchmark by three times for one single day and the the fund should not be expected to be accurate for periods greater than one day. This does not mean-revert as quickly as UVXY does. Now, if you’re a day trader and don’t have any positions, taking DUST long is a way to get offensive during gold miners selloff.
Direxion Daily S&P Biotech Bear 3X ETF (LABD)
Market participants looking to profit or hedge from a selloff in biotech stocks could look to LABD. It attempts to replicate the investment results of three times the daily performance of the S&P Biotechnology Select Industry Index.
If you long positions concentrated biotech stocks, taking LABD long could be a viable hedge. If you read the overview, you shouldn’t expect it to provide three times the inverse return of the benchmark’s returns for periods longer than one day. In other words, be careful if you plan on holding this for a day or more.
Now, we mentioned some leveraged ETFs, but you should understand leveraged ETFs are volatile. Consequently, you need to position size accordingly. You don’t have to be an options guru to hedge your stock positions. If you’re not comfortable shorting, getting long inverse ETFs is a viable alternative to reducing risk during volatile market conditions.Moreover, if you’re looking to hedge your portfolio, you may consider some of these exchange-traded products, if they fit your risk profile.
Jason Bond runs JasonBondTraining.com and is a swing trader of small-cap stocks.