During volatile conditions, many opt to shift to cash in a knee-jerk reaction to shield a portfolio from further swings. However, investors should consider alternative exchange traded fund strategies as a better way to protect themselves.
“We believe that investors can keep their investment strategies on track for the long term even in the current uncertain times without retreating to cash,” UBS global chief investment officer Mark Haefele said in a note, CNBC reports.
“A high allocation to cash over the longer term increases the risk that investors will fail to achieve their financial goals,” Haefele added.
UBS advised investors to consider a range of defensive strategies as a way to protect longt0erm gains, including investments like high and sustainable dividend stocks and gold.
“Dividend investing is a defensive investment style that generates regular cash flows for investors and tends to outperform when markets are volatile,” Haefele said.
Haefele pointed out that dividend stocks typically do well in low rate environments and are more stable than earnings.
ETF investors can also target quality dividend stocks through a number of options. For instance, investors can look to dividend growth ETF strategies that target dividend payers that consistently increase annual dividends, such as the iShares Core Dividend Growth ETF (NYSEArca: DGRO), ProShares S&P 500 Aristocrats ETF (NYSEArca: NOBL), Vanguard Dividend Appreciation ETF (NYSEArca: VIG), and Schwab US Dividend Equity ETF (NYSEArca: SCHD), among others.
Gold has also acted as a historical safe-haven play during a low rate environment, with volatile equities and a weak dollar. UBS argued that gold can provide stability to investor portfolios.
There are now a number of gold ETFs on the market that investors can choose from, including the SPDR Gold Shares (NYSEArca: GLD), iShares Gold Trust (NYSEARCA: IAU), GraniteShares Gold Trust (BAR), Aberdeen Standard Physical Swiss Gold Shares ETF (NYSEArca: SGOL) and VanEck Merk Gold Trust (NYSE Arca: OUNZ). The gold-related ETFs are backed by gold bullion stored in a vault, so investors essentially gain direct exposure to physical gold through these ETFs.
Additionally, Haefele believed that there are opportunities in put options that help investors sell at designated price points.
“Put-writing strategies tend to perform better in sideways equity markets, when investors benefit more from regular cash flows than from directional exposure,” Haefele said.
For example, something like the WisdomTree CBOE S&P 500 PutWrite Strategy Fund (NYSEArca: PUTW) and the WisdomTree CBOE Russell 2000 PutWrite Strategy Fund (Cboe: RPUT) can help investors generate income by selling volatility through writing options. PUTW includes one- and three-month Treasury bills and sells or “writes” one-month, at-the-money, S&P 500 Index puts. RPUT is a put write strategy on the Russell 2000 Index. Investors can use these strategies to help lower portfolio beta and reduce downside risk. The strategy can generate higher potential income if the VIX stays elevated, and the income generated can offset potential losses if equities pulled back, especially in a highly correlated and volatile market.
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