U.S. stocks have rebounded and are heading toward new record highs, but some more wary investors are already worried about the potential negative ramifications of political risk in an election year. ETF investors can also consider alternative strategies to hedge against further market volatility ahead.
While the U.S. presidential election is still three months away, some are already prepping for heightened volatility associated with prolonged political uncertainty, the Wall Street Journal reports.
For instance, some are speculating that President Donald Trump could try to delay the election or disrupt mail-in voting, along with a chance of an unclear result for weeks after polls close.
“The real uncertainty that could confront investors is if there is material concern over the legitimacy of the process to decide a winner,” Bridgewater Associates told clients. “Given President Donald Trump’s personality, his statements about the likelihood of fraud, and the relatively untested and unclear process for reaching a resolution, it is a possibility in our minds.”
These election fears only add on to existing concerns over a weak economy with millions still unemployed, a possible wave of coronavirus infections later this year, and uncertainty over a stalled coronavirus stimulus package.
Consequently, some are already looking at alternative investments to hedge market risks. For example, Eric Metz, chief investment officer at investment firm SpiderRock Advisors, has included stock-options for clients that would profit if the S&P 500 drops up to 25% from its current level through early next year, which includes a strategy of one bearish put option tied to the S&P 500 while selling another.
“We’re focusing on January,” Metz told the WSJ. “Giving yourself a little bit more time…will prove prudent for all the unforeseen or unknown things that could happen.”
Paul Britton, Founder of Capstone Investment Advisors LLC, said his firm has been using the Cboe Volatility Index, or the VIX, as well as options contracts, to bet on volatility through the end of the year.
“You always get this interest ahead of an election,” Britton told the WSJ. “You’ve got a greater interest because of the added uncertainty.”
As a way to hedge market risks, ETF investors can also look at volatility trades, such as the iPath Series B S&P 500 VIX Short Term Futures ETN (NYSEArca: VXX) and the ProShares VIX Short-Term Futures ETF (NYSEArca: VIXY). Potential investors should keep in mind that VIX-related exchange traded products track VIX futures and not the spot price.
Additionally, ETF traders who are looking to protect their portfolios from potential pullbacks ahead may consider some exposure to bearish or inverse ETFs to hedge against further falls.
For example, the ProShares Short S&P500 (NYSEArca: SH) takes a simple inverse or -100% daily performance of the S&P 500 index. Alternatively, for the more aggressive trader, leveraged options include the ProShares UltraShort S&P500 ETF (NYSEArca: SDS), which tries to reflect the -2x or -200% daily performance of the S&P 500, the Direxion Daily S&P 500 Bear 3x Shares (NYSEArca: SPXS), which takes the -3x or -300% daily performance of the S&P 500, and ProShares UltraPro Short S&P 500 ETF (NYSEArca: SPXU), which also takes the -300% daily performance of the S&P 500.
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