Portfolio Hedging with three ETFs for downside protection
Investing

Portfolio Hedging Strategy Using 3 ETFs

Having a solid portfolio hedging strategy in your back pocket is very important as you embark on your investing journey. In order to protect your portfolio from any potential downturns, you need to equip yourself with appropriate downside protection in the form of safe havens. No matter your starting point, a portfolio hedging strategy is a must for keeping risks in check.

$TLT: iShares 20+ Year Treasury Bond ETF

“The investment seeks to track the investment results of the ICE U.S. Treasury 20+ Year Bond Index (the “underlying index”). The fund generally invests at least 90% of its assets in the bonds of the underlying index and at least 95% of its assets in U.S. government bonds. The underlying index measures the performance of public obligations of the U.S. Treasury that have a remaining maturity greater than or equal to twenty years.”

TLT is negatively correlated with the market, which means when the S&P rises, TLT will typically fall, over the past three years this correlation has been roughly -.33. When things start to turn south, treasuries are “ol reliable”. (YTD return: 17.14%, Yield: 2.25%). Trust in treasuries for healthy portfolio hedging.

$XLU: Utilities Select Sector SPDR Fund

“The investment seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of publicly traded equity securities of companies in the Utilities Select Sector Index. In seeking to track the performance of the index, the fund employs a replication strategy. It generally invests substantially all, but at least 95%, of its total assets in the securities comprising the index. The index includes securities of companies from the following industries: electric utilities; water utilities; multi-utilities; independent power and renewable electricity producers; and gas utilities. The fund is non-diversified.”

When times are trying, investors flock to utilities as a safe haven to weather storms. This ETF, much like $TLT, tends to trend upwards when the market retreats. However, $XLU is positively correlated with the market, meaning it tends to move with fluctuations in the S&P. Compared to other ETFs, the utilities ETF is far less correlated, at just .25. (YTD Return: 21.76%, Yield: 2.96%).

$TMF: Direxion Daily 20+ Year Treasury Bull 3X Shares

“The investment seeks daily investment results, before fees and expenses, of 300% of the daily performance of the ICE U.S. Treasury 20+ Year Bond Index. The fund, under normal circumstances, invests at least 80% of its net assets (plus borrowing for investment purposes) in financial instruments and securities of the index, ETFs that track the index and other financial instruments that provide daily leveraged exposure to the index or ETFs that track the index. The index is a market value weighted index that includes publicly issued U.S. Treasury securities that have a remaining maturity of greater than 20 years. The fund is non-diversified.”

$TMF is the motherlode for all hedges. This hedge is a leveraged index fun that returns the equivalent of triple the daily return of the $TLT treasuries ETF. With the same basic statistics of $TLT, $TMF can be weighted at a fraction of your total portfolio, allowing you more free capital to invest in long positions. Exercise extreme caution with leveraged ETFs. When the market makes huge moves they are very unforgiving. Never overweight your portfolio in a Leveraged ETF, and consider it for only short time periods. (YTD return: 45.66%, Yield: 1.01%).

Portfolio hedging is enormously beneficial when the market begins to pull back. You can cash out on the instruments with which you are doing your hedging when they appreciate in value above 10%, or hold them further for more upside potential.

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