After an extended bull rally in equities and fixed-income assets, the market environment may be changing. Consequently, investors who are interested in hedging against a shift in the winds can utilize inverse exchange traded funds to help protect their portfolios.
On the upcoming webcast, Building Tactical Strategies to Combat Today’s Market Challenges, Mike Eschmann, managing director and co-head of capital markets & institutional strategy team for Direxion Investments, will join Matthew Tuttle, CEO & CIO of Tuttle Tactical Management, Sharon Snow, CEO of Metropolitan Capital Strategies, and David Dziekanski, portfolio manager for Toroso Investments, to discuss market challenges ahead and ways to adjust an investment portfolio to head off the potential challenges.
While many investors have gotten used to the idea of going long and capitalizing off the rally in stocks and bonds, people should begin to think about adding in a tactical hedge to offset short-term down swings. [Where Inverse ETFs Fit in an Investment Portfolio]
Looking ahead, the Federal Reserve interest rate hike has been a major point of concern for market players. In anticipation of higher rates ahead, investors can utilize inverse ETFs to hedge their fixed-income portfolio’s duration risk – the measure of a bond fund’s sensitivity to changes in interest rates, so a fund with a longer duration has a greater risk of price depreciation in response to rising rates.
Consequently, investors who want to protect their portfolios against rising rates could turn to inverse and leveraged ETFs that would gain as bond prices fall and interest rates rise. For instance, the Direxion Daily 20-Year Treasury Bear 3X ETF (NYSEArca:TMV), which takes the -300% daily return of long-term Treasury bonds, is one popular play to hedge fixed-income exposure.
Additionally, some active traders may find leveraged options as an attractive way to juice returns. For example, the Direxion Daily Healthcare Bull 3x Shares (NYSEArca:CURE), the triple-leveraged answer to the hot healthcare sector, has surged 14.6% year-to-date. [Triple-Leveraged Biotech ETFs Could be Coming Soon]
Nevertheless, potential investors should also understand how the geared products work and the potential risks involved. Specifically, since the ETFs rebalance on a daily basis, leveraged ETF returns can fall behindtheir intended 2x or 3x strategies in times of increased volatility. Investors would have to take a more active role in monitoring their inverse and leveraged positions.
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.