Hedging Made Easy: Portfolio Protection Using ETFs (TIP, LQD, AGG, DXD, QID, EFA, EEM, FXI, VEA)
Don’t let the market’s recent run erase what you learned during 2008.
Hedging bets in the market is important to limiting downside risk – something many investors learned the hard way in 2008. However, well-protected portfolios likely haven’t fared as well in 2009, as the market shot straight up from its lows back in March. While the market’s direction in 2010 is to be determined, investors would be well advised to add some risk protection to their portfolios. Thanks to the proliferation of exchange-traded funds (ETFs), it is easier than ever to diversity holdings and hedge against potential downside risk.
A look at the the tickerspy ETFs Super Index shows that there are a multitude of ETF-based plays in sectors ranging from international currencies to commodities, as well as various corners of the equity markets.
The Bond ETFs Index’s performance chart shows that these “stocks” were largely immune to the market’s downturn in 2008. While relatively unexciting on the upside, bond ETFs are a great place to stash capital during an equity market correction. The iShares Barclays TIPS Bond Fund (TIP), iShares iBoxx $ Investment Grade Corporate Bond Fund (LQD), and iShares Barclays Aggregate Bond Fund (AGG) are all favorites among Pro investors.
Confident stock pickers who are unsure of the market’s overall direction can buy select components of the Leveraged ETFs Index to protect against downside risk. The ProShares UltraShort Dow30 ETF (DXD) and ProShares UltraShort QQQ ETF (QID) are both designed to track double the inverse of the respective Dow 30 and Nasdaq 100 benchmarks. “Shorting” the market while betting on individual equities to outperform can limit gains in a bull market, but when the market pulls back the well-hedged portfolio is protected.
Another way to hedge bets is simply to diversify. If your portfolio is full of U.S. stocks, maybe it’s time to add some international exposure. At the end of the third quarter, 221 Pros counted the iShares MSCI EAFE Index Fund (EFA) among their top-15 U.S.-listed equity holdings. The ETF is designed to track the international benchmark, which includes stocks from Europe, Australasia and the Far East. The iShares MSCI Emerging Markets Index ETF (EEM), iShares FTSE/Xinhua China 25 Index ETF (FXI), and Vanguard Europe Pacific ETF (VEA) were also popular among Pros at the end of Q3.
For more on these ETFs and many more, visit tickerspy.com, where ETF Indexes range from “green” plays to currencies and everything in between.
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