By Jeff Reeves
I know what you’re thinking: Why, oh why, didn’t we all just “sell in May and go away” like that stupid Wall Street saying recommended?
On the heels of a 1/2-point boost to interest rates by the Federal Reserve on Wednesday – the biggest such increase in 20 years – the stock market sank on Thursday; the Dow Jones Industrial Average /zigman2/quotes/210598065/realtime DJIA -0.42% lost more than 3%, as did the S&P 500 /zigman2/quotes/210599714/realtime SPX +0.16% . Meanwhile, the tech-heavy Nasdaq Composite /zigman2/quotes/210598365/realtime COMP +1.75% lost a staggering 5%.(will update)
Plenty of other articles will hash out the hows and whys behind recent volatility. This is about potential actions to take via tactical alternatives and defensive strategies that may be attractive in the current market.
Don’t worry about learning sophisticated options or futures trading techniques. All these picks are ETFs that are liquid and easily tradable in most standard brokerage accounts. Just remember that, as in all things, you should do your own research and make moves based on your personal goals – not on what some pundit tells you.
Short the market
Want to “short” the stock market because you think it will keep falling? The ProShares Short S & P500 ETF /zigman2/quotes/203681224/composite SH -0.24% is a simple and liquid way for small-time investors to see their investments go up when the stock market goes down. Through a system of derivatives contracts, the roughly $2 billion fund aims to deliver the opposite of the daily movement in the S&P 500 index.
This isn’t a faithful 1-to-1 inverse of the S&P over the long term, but it’s pretty darn close. Case in point: this ETF is up 7.2% in the past month while the S&P 500 is down 7.4% in the same period through Thursday’s close.
There are other flavors of “inverse” funds that short the market, too. For instance, if you want a fund more targeted to tech to bet on the downside of this specific sector, consider the tactical Tuttle Capital Short Innovation ETF /zigman2/quotes/230869276/composite SARK -9.09% . This roughly $350 million ETF aims to deliver the inverse of the fashionable investments that make up the once-fashionable and currently struggling ARK Innovation ETF /zigman2/quotes/204808965/composite ARKK +9.10% . This inverse fund is up 27.7% in the past month.
Of course, when the stock market goes up, these inverse funds go down. And in the case of SARK, it could go down just as fast.
Tail risk ‘insurance’
More of an insurance policy than a way to build your nest egg, the Cambria Tail Risk ETF /zigman2/quotes/204371529/composite TAIL +0.28% is a unique vehicle that is focused on “out of the money” put options purchased on the U.S. stock market along with a hefty allocation in low-risk U.S. Treasurys.
The idea is that these longshot options don’t cost much when the market is stable, but are a form of insurance you’re paying for to guard against disaster.
And just like your auto insurance, when there’s a crash you are covered and get paid back to offset your losses. As proof of this approach: While the Dow Jones lost more than 1,000 points on Thursday, TAIL tacked on 2.2%.
Over the past year, however, it’s down more than 11%, much more than the S&P 500’s 4% decline. That’s the price you pay for this kind of insurance when it goes unneeded — but in volatile times like these, the backstop comes in handy.
Many investors reduce their risk profile or generate greater income through the use of options. But if you’re not interested in do-it-yourself options trading, a fund like the JPMorgan Equity Premium Income ETF /zigman2/quotes/218574472/composite JEPI -0.70% could be worth a look. JEPI is a $9 billion fund that has exposure to the S&P 500, but its managers also sell options on U.S. large-cap stocks using a strategy known as “covered calls.”
In a nutshell, selling these options contracts caps your upside if markets are ripping higher but guarantees a flow of cash if markets move sideways or lower. As a result JEPI has a yield of about 8.0% over the last 12 months – and while it has fallen 5.5% in the past month, that’s not as bad as the S&P’s 7.5% skid in the same period.
There’s also the Global X NASDAQ 100 Covered Call ETF /zigman2/quotes/205578385/composite QYLD +0.57% , a roughly $7 billion ETF tied to the Nasdaq-100 index if you prefer to deploy this strategy on this tech-heavy benchmark instead.
Low-volatility funds offer a variant on traditional investing strategies by overlaying a screen that keeps out the fastest-moving picks. This naturally means they may underperform during red-hot periods for the market, but that they tend to be “less bad” when things get rocky.
Take the $9 billion Invesco S&P 500 Low Volatility ETF /zigman2/quotes/201108430/composite SPLV -1.64% . This fund has underperformed over the three-year or five-year period thanks to a generally favorable environment for stocks, where the volatility has been to the upside. But in 2022, it is down 5.2%, much less than the S&P 500’s 13% plunge.