Investors who thought that the stock markets would continue with its bull run in 2014 have definitely been caught off guard, at least for the time being. After posting a robust 30% return in 2013, S&P 500 fell around 3.6% at the close of last month, marking the first monthly decline since May 2012.
The taper factor was certainly plaguing the markets and a slew of sluggish economic data did not help matters. Moreover, concerns over slowdown in the world’s second largest economy, China, contributed to the volatility.
Also, emerging market currencies are witnessing extreme volatility. Argentina’s currency decline marked the biggest tumble in more than a decade, while the currencies of other emerging markets including Turkey and South Africa weren’t spared either.
Thus, given the current volatile market scenario and that the Fed has began winding up its massive stimulus program, it might be prudent for investors to reallocate their portfolios to low risk products.
Low Risk ETFs
Low risk investments can prove to be quite effective in one’s portfolio in arresting downside risks as compared to high beta products. It is one of the most popular investing themes these days, given the significant jump in volatility since the start of the year.
These products have a low correlation with other assets classes, and as such, go a long way to reduce the overall portfolio risk.
Below, we have mentioned three low risk ETFs which can be good choices to add to one’s portfolio, if the current turmoil in the markets continues.
U.S. Market Neutral Anti-Beta Fund (BTAL)
Using a long-short strategy might be a perfect way for investors to hedge their portfolio amid the volatility in the market. As such, BTAL is a good choice to do so (see all the Long-Short ETFs here).
The fund tracks the performance of the Dow Jones U.S. Thematic Market Neutral Anti-Beta Index before fees and expenses. BTAL charges 99 basis points as fees, slightly expensive than other broad based ETFs.
BTAL takes a long position on low beta stocks, while at the same time taking a short position on high beta securities of approximately equal dollar amounts, within each sector. The index seeks to deliver the spread return between low beta and high beta stocks (stocks that are more volatile than the index).
The fund is equal weighted, dollar neutral, sector neutral and doesn’t uses leverage. The fund holds a long position in 200 stocks, having an average beta of 0.87, and a short position in another basket of 200 stocks with an average beta of 1.43.
Investors are expected to profit from this fund when the basket of long stocks outperforms the short portfolio.
Also, investors should keep in mind that due to the fund’s unique style of investing, the fund will underperform in bull markets and outperform in bear markets.
As such, the fund lost 11% in 2013. Though that’s the case for last year, things might turn around this year, if the current sluggishness in the markets continues.