Tag Archives: vqts

4 Ways To Hedge Volatility With ETFs

Volatility levels have picked up lately though chances of a turnaround are little, at least in the near term. This is especially true as a faltering Chinese economy rattled the global markets in recent weeks and intensified fears of global repercussions. Plunging oil price, which is yet again threatening global growth and deflationary pressure, and slowdown in key emerging markets have added to the woes. All these factors might dim the chances of the Fed’s September lift-off and delay the rates hike to later this year or early next year. On the other hand, a series of upbeat data on the domestic front is supporting the prospect of a rates hike. The second estimate of Q2 GDP data came in much higher than the initial estimate, the housing market is improving, consumer confidence is rising, and the unemployment rate dropped to a seven-and-half year low. All these signaled that the U.S. economy is doing quite well on several aspects. In such a backdrop where international fundamentals are weak but domestic economy is on a firmer footing, investors may want to stay allocated to the U.S. markets and might take advantage of the beaten down prices. However, rising volatility might put their returns at risk. In order to exploit the current trend, investors should apply some hedge techniques to the equity portfolio. While there are number of ways to do this, we have highlighted four volatility-hedged ETFs that could prove beneficial amid market turbulence. Investors should note that these funds have the potential to stand out and might outperform the simple vanilla funds in case of rising volatility. How to Play PowerShares S&P 500 Downside Hedged Portfolio (NYSEARCA: PHDG ) This actively managed fund seeks to deliver positive returns in rising or falling markets that are uncorrelated to broad equity or fixed-income market returns. It tries to follow the S&P 500 Dynamic VEQTOR Index, which provides broad equity market exposure with an implied volatility hedge by dynamically allocating between different asset classes: equity, volatility and cash. The S&P 500 Total Return represents the equity component while the S&P 500 VIX Short-Term Futures Index represents the volatility component of the index. The non-equity (volatility + cash) portion makes up for one-fourth of the portfolio, while the rest goes to equity. In terms of equity holdings, the fund is widely diversified across sectors and securities. None of the firms holds more than 2.72% share while technology, health care, financials, consumer discretionary and industrials occupy the top five spots with a nice mix in the portfolio. The fund has accumulated $462.5 million in its asset base and trades in a moderate volume of around 179,000 shares per day. It charges 40 bps in fees per year from investors and was down 1.8% in the trailing one-month period. Barclays ETN+ S&P VEQTOR ETN (NYSEARCA: VQT ) This is an ETN option tracking the S&P 500 Dynamic VEQTOR Index. VQT uses volatility futures contracts directly to hedge volatility. It increases allocation to the equity component as measured by the S&P 500 Total return index, in times of low volatility. On the other hand, it increases volatility exposure as measured by the S&P 500 VIX Futures Total Return index and allocates entirely into cash if the index slumps 2% or more in the preceding 5 days. In this manner, the note manages to keep a check on volatility. The product has amassed $434.7 million in AUM while sees light volume of nearly 28,000 shares per day on average. It is a bit pricey, charging 95 bps in annual fees. The ETN lost 1.7% over the past one month. Janus Velocity Volatility Hedged Large Cap ETF (NYSEARCA: SPXH ) This ETF tracks the VelocityShares Volatility Hedged Large Cap Index and looks to hedge “volatility risk” in the S&P 500, offering investors exposure to not only the S&P 500 but also both long and inverse exposure in short-term VIX futures. The product provides target equity exposure of 85% to the S&P 500 using large cap ETFs, while the remaining 15% goes to the volatility strategy through one or more swaps. The fund trades in a light volume of roughly 7,000 shares a day and charges 71 bps in annual fees. The ETF shed nearly 3.2% in the past one-month period. ETRACS S&P 500 VEQTOR Switch ETN (NYSEARCA: VQTS ) This product entered the market 10 months ago and has been able to garner $22.8 million in its asset base. It follows the S&P 500 VEQTOR Switch Index, which seeks to simulate a dynamic portfolio that allocates between equity and volatility based on realized volatility in the broad equity market. The allocation to the equity component is dynamically adjusted to gain exposure to the S&P 500 with a target volatility of 10%. The remainder of the index is allocated to the S&P 500 VIX Futures Long/Short Switch Index that allocates between cash and long or short positions in an index of VIX futures with a constant one-month maturity. This means that when realized volatility is 10% or less, the index allocates 100% to the S&P 500 Index. When realized volatility exceeds 10%, the index allocates a portion to the S&P 500 Index and the remainder to the futures index. This approach results in higher expense ratio of 0.95%. Volume is also paltry at about 4,000 shares. VQTS was down nearly 8% over the past one month. Bottom Line Investors could definitely hedge volatility in their portfolio with the help of the above-mentioned products, which provide dynamic exposure according to the level of market volatility. These are least affected by any market turmoil and could prove great choices when it comes to protection against market downturn. Original Post

A Prudent Portfolio For A Melt-Up Or A Meltdown Redux

Summary Uses a mix of trend-following, active, hedged, and passive management style funds. Selects a stalwart, plain-vanilla benchmark for performance going forward. Constructed in the context of an aging bull market for both equities and bonds. Many portfolios, especially from the DGI crowd, have the dynamic active benefit of additions, subtractions, and constant tweaking by their authors. We always know what they are considering buying, selling, etc., with every article. I also feel that tmy hypothetical “Prudent Portfolio for a Melt-Up or Meltdown,” discussed in 2014, is not a static experiment; it should benefit from some updating and tweaking as well. The main goal of this hypothetical portfolio was simplicity and balance using only five funds in the context of an aging bull market that could still participate if the bull market continues or could ride out some punches from a correction. Much has happened since the inception of this portfolio back in 2014. Old Portfolio and Lessons Learned: TNDQ , PHDG , AGG , GGN , and UUP The TNDQ ETN and all the other RBS ETNs have been discontinued by their sponsor. Gold has continued its downward chaffing spiral, taking = with it the GGN closed-end gold income fund. Too much portfolio weight was given to this falling knife. Tame VIX futures in contango has mercilessly beleaguered the PHDG holding with its partial volatility futures holdings. All was not dreary, as the dollar surged this year, and correspondingly, the UUP fund benefited. Bonds have been a bit of a roller coaster, but the modest net durations of the AGG ETF still provided some desirable ballast. The “Updated Melt-Up or Meltdown” Portfolio: PTNQ , VQTS , TOTL , CEF , and AMFQX Pacer Trendpilot 100 ETF (BATS: PTNQ ) This ETF replaces the recently defunct TNDQ ETN. It has a similar moving average timing strategy tracking the same alpha rich NASDAQ 100 index – but is tweaked with a “50/50” allocation before totally going to the safety of 3 month U.S. treasuries. The complete strategy is as follows: When the NASDAQ 100 index closes above its 200 day simple moving average for 5 consecutive days the fund will be 100% invested in the NASDAQ 100 index. When the NADAQ 100 index closes below its 200 day simple moving average for 5 consecutive days the fund will switch to 50% to the index and 50% to 3 month treasuries. When the NASDAQ 100 index 200 business day simple moving average closes lower than its value from five business days earlier, the exposure of the Index will be 100% to 3-Month US Treasury bills. Once this “T-Bill Indicator” has been triggered, the Index will not return to its 50/50 position until the index closes above the 200 day sma as described earlier, followed by the 50/50 Indicator being triggered as described above. In summary this fund gradually seeks to avoid a deep correction in a gradual manner using 5 business day windows for signals rather than popular end of month signals. The strategy essentially hedges in steps and attempts to limit affects of market “head fakes” of brief periods when falling below the 200 day sma. The fund already has assets of over 27 million and is less than 2 months old. The other two Pacer index based trend following ETFs are growing rapidly as well. This author is long PTNQ. See pictorial below of the hedging strategy from the folks at Paceretfs : ETRACS S&P 500 VEQTOR Switch Index ETN (NYSEARCA: VQTS ) This ETN essentially addresses the drawbacks of the strategy index that PHDG and VQT follows. It dynamically allocates between the S&P 500, VIX futures (either long or short depending on slope of the VIX futures curve), and cash. I wrote about it here as well as fellow SA contributor Vance Harwood’s nice write up here . This ETN seeks to exploit the main weakness of the regular VEQTOR index by “switching” and having a short position in VIX futures and gaining additional alpha from the negative VIX futures roll yield during periods of steep contango. It makes for an excellent replacement for PHDG from the previous portfolio. Assets are still rather on the light side at about 25 million, but this ETN is young and will likely grow to robust asset levels. Especially if there is a steep correction like we had in 2011. SPDR DoubleLine Total Return Tactical ETF (NYSEARCA: TOTL ) The iShares AGG aggregate total bond ETF’s “dumb index” has been replaced with the steadfast expertise of Jeffery Gundlach’s active management for the bond portion of the portfolio. Bonds in my opinion, especially now more than ever need some active management. With upcoming rate increases promised by the FED, a bond guru will be a welcome addition to help tame some bond angst and volatility. This ETF version of his flagship portfolio has outperformed the total bond index handily. The mild average durations of 4 years along with hands on active management should make for some nice ballast for the portfolio. This ETF has an expense ratio of 0.55% and a healthy AUM of over 850 million. More info about this fund available here . Central Fund of Canada Ltd. (NYSEMKT: CEF ) This closed-end fund replaces the beleaguered and volatile GGN fund. With gold down in the trash heap of most investors radar this well regarded CEF was chosen for the small precious metals portion of the portfolio. This fund holds marketable gold and silver bullion. The fund currently sports around a 9% discount to NAV. This popular fund has a long history and is cheaper with fees of only 0.32%. No one knows how low gold will go especially in this backdrop of a strengthening dollar and threats of higher rates, but one could catch the falling knife and could take comfort that with this fund you will at least take a position at a considerable discount to NAV. More about this fund available here . 361 Managed Futures Strategy Fund (MUTF: AMFQX ) As bonds become less desirable and correlations increasing throughout asset classes – an alternative type of fund may be beneficial to a portfolio. For this updated portfolio a managed futures strategy seemed like a logical fit for this balanced “melt up or meltdown” theme. This four star Morningstar rated 361 Managed Futures Strategy Fund uses a counter trend strategy designed to navigate choppy volatile markets. Managed futures by design have low correlations to core assets such as bonds and equities and can reduce overall risk and volatility to a portfolio. Fees run about 2%. The fund’s performance so far this year have been stellar with it being up around 10%. More about this fund available here . Weightings The weightings of the balanced Updated Prudent Portfolio for Melt-Up or Meltdown are as follows: 30% PTNQ 30% VQTS 20% TOTL 15% AMFQX 5% CEF This summarily is 60% U.S. equities (index based and systematically hedged), 20% bonds (actively managed), and 20% alternatives and precious metals (actively managed and partially passive). The Benchmark: Vanguard Balanced Index Fund (MUTF: VBINX ) This venerable stalwart is cheap, passive and effective over the long term. It’s U.S. centric and is a formidable benchmark for this upgraded portfolio. It consists simply of 60% the total U.S stock market and 40% the aggregate U.S. bond market. It’s fees are only 0.23% and that immediately gives this “Melt Up or Meltdown Portfolio” a hump that will have to be overcome with alpha and/or reduced drawdowns. It should be a fun exercise comparing this updated portfolio to the this popular passive mutual fund. Summary and Caveats The construction of this updated hypothetical portfolio was an interesting exercise. The bar is set high for the future – competing with the performance of the before mentioned Vanguard Balanced Index Fund. In the context of an aging bull market for both equities and bonds it seemed timely for portfolio mixes of smart beta, index hedged, managed futures, and active management funds to hopefully shine in some outperformance in the years to come. One could use Morningstar or portfoliovisualizer.com,etc. to track it. Always read prospectuses and other fund literature before investing. Always use limit orders for lightly traded funds. Disclosure: I am/we are long VQTS, PTNQ. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.