Volatility is here to stay. There’s no doubt about it. Thanks to Trump’s continued tweeting and flip-flopping about the trade war, dwindling economic data and overall general malaise, the market is starting to see some big swings as investors try and digest the environment. And with the yield curve inverting, many analysts are predicting a recession could be in our future. All in all, it’s making for many sleepless nights.
But it doesn’t have to be. Not if you use exchange-traded funds (ETFs) to bolster your portfolio.
One of the great things about ETFs is that they allow investors to tap a variety of asset classes and strategies. That includes a hefty amount of portfolio hedging. By buying certain ETFs, you can instantly knock down the risk portfolio of your portfolio, add non-correlated assets and ride out the storm. More importantly, using certain ETFs you can finally have a good night’s sleep in the face of all this market volatility.
With the current environment only getting worse, it makes sense to find ways to lower your risk and these three ETFs to buy will do just that.
iShares Edge MSCI Min Vol USA ETF (USMV)
Some stocks just “move” less than others and one of the best ways to fight volatility is to bet on those that do. But combing through the thousands of individual names to find those that offer lower volatility can be a very difficult task. That’s where ETFs can come in handy and the iShares Edge MSCI Min Vol USA ETF (NYSEARCA:USMV) makes quick work of the chore.
The $32 billion ETF is the largest fund in the low-vol category and for good reason. As a so-called smart-beta ETF, USMV uses various screens to kick out high-volatility stocks in order to capture the upside of the market and at the same time eliminate the downside. The idea is that betting on stocks like Visa (NYSE:V) and garbage company Republic Services (NYSE:RPG) that have historically shown lower overall volatility will result in a smoother ride for portfolios. You still get most of the market’s gains but limit the losses.
And so far, USMV has delivered on that promise. Since its inception, USMV has managed to capture 81% of the broader market’s gains, but only realized 54% of its declines. For example, during the recent swoon in December of last year, the ETF only lost 7.1% vs a more than 9% loss for the S&P 500. By using USMV, investors can still stay invested and reduce their risk. In this environment, that’s very important.
The best part is that the ETF is dirt cheap to own. As part of iShares’ core line-up, USMV charges just 0.15%, or $15 annually per $10,000 invested.
All in all, for those looking for equity exposure, USMV is one of the best ETFs to buy to ride out the volatility.
SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (BIL)
Let’s call a spade, a spade. We’ve had nearly a decade of economic expansion and stock market gains. There’s a good chance that your portfolio is also much higher even with the recent volatility and lower returns. With that, there’s no harm in taking some gains off the table and moving some money to cash. You won’t return a lot, but sometimes getting a return of principal is better than a return on price. And ETFs can help on this front as well.
A prime example is the SPDR Bloomberg Barclays 1-3 Month T-Bill ETF (NYSEARCA:BIL).
The $9 billion ETF tracks ultra-short U.S. treasury bonds and spreads its assets among 15 holdings. Those bonds that mature every one to three months give the ETF a duration of just 32 days. This is important as it allows the ETF to roll over its holdings faster and it is basically immune from rising and falling rates.
Moreover, this ultra-short nature provides it with a very steady share price. This gives it cash-like properties and allows it to be a great place to hide-out when the market gets stormy. In fact, as an ETF, BIL has become a preferred choice for many institutional investors looking to quickly move into cash when the volatility hits.
Returns for BIL have been low over its history. But that’s kind of the point. It’s designed to be the ballast for your riskier holdings and on that front, the ETF succeeds. With a low expense ratio of just 0.13%, BIL makes a great cash-alternative for the current volatile environment.
Aberdeen Standard Physical Swiss Gold Shares ETF (SGOL)
In times of duress, nothing glitters like gold. And right now, the precious metal is shining bright. Prices for gold have surged to near six-year highs as the market has gotten wonky and volatility has risen. To that end, hedging a portion of your assets with the non-correlated nature of gold could make a ton of sense. The best part is that ETFs make owning gold easy and eliminates many of the headaches about buying physical gold bars and coins.
The Aberdeen Standard Physical Swiss Gold Shares ETF (NYSEARCA:SGOL) is just one of the many ETFs that provide access.
SGOL is what’s known as a physically backed exchange-traded fund. That is, each share is backed by one-tenth of an ounce stored on behalf of investors in a vault. The twist for the Aberdeen fund is that the gold is stored in a vault in Switzerland, which, given its neutrality from foreign affairs, is supposedly safer. The real beauty for investors is that this ETF makes owning the precious metal beyond simple. Buy ten shares and you have one ounce of the precious metal in your portfolio. It really is that easy.
The best part for investors is that since investment manager Aberdeen has taken over the ETF, expenses for the fund have shrunk considerably. Costing just 0.17% in expenses, SGOL is now cheaper than other gold ETFs like the SPDR Gold Shares (NYSEARCA:GLD) ETF. That makes it a prime portfolio consideration for these times.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.