Tags: Hedge | stock | market | volatility

WSJ: The Cheap Way to Hedge Against Stock-Market Volatility

Sunday, 24 Aug 2014 08:30 PM

By Dan Weil

The stock market has endured several spates of volatility this year. So how should you guard against future bouts of it?

One option is low-volatility exchange-traded funds. Many investors are apparently opting for this strategy, sending $10 billion into the 10 biggest low-volatility ETFs since the beginning of 2010, according to Morningstar, The Wall Street Journal reports.

The funds invest in stocks with relatively stable share prices. These are frequently blue-chip, large-cap, value stocks with substantial dividends.

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But the simplest way to reduce your exposure to volatility may be to increase your weighting for bonds and/or cash, according to The Journal.

By selling some stocks and increasing cash reserves, investors can shield themselves from a market downturn and have dry powder ready to deploy when stock prices fall.

"History suggests that converting one-third of a stock portfolio into cash is an alternative to buying a low-volatility fund," Jack Ablin, chief investment officer at BMO Private Bank, told the Journal.

To be sure, volatility has been muted lately. The CBOE Volatility Index (VIX) closed at 11.47 Friday, a one-month low.

"Central bank accommodative policies tend to limit tail risks and therefore to prevent big market drawdowns and very high volatility spikes," Ramon Verastegui, head of strategy at Societe Generale in New York, told Bloomberg.

Even geopolitical unrest hasn't been boosted volatility for long. "We’ve had turmoil in the Ukraine, Syria, Iraq, and the West Bank," Arthur Lu, director of equity-trading strategy at Citigroup, told Bloomberg.

"U.S. investors have taken hits and been mostly resilient to them."

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