Summer Hedge: A Few ATFs
Benzinga | May 21, 2012 01:47PM ET
It feels as though another summer swoon is coming. The old adage of "sell in May and go away" feels like it's about to be proven correct once again. The last two years have seen significant summer sell-offs, so why should this time be different? The root causes of the previous slow-downs are still present: weakening U.S. growth, the European debt crisis and continued slowdowns in emerging markets. However, with U.S. ten-year yields below 1.75%, hedging equities with bonds seems extremely risky. So, the real question is, what are good ways for individuals to hedge against tail-risk events? Here are a few ETF's that could help.
As we can see from this chart, the VXX (NYSE: VXX) is a great hedge to stocks. As the S&P 500 rises, the VIX falls, and vice versa, and so a great way to trade an imminent sell-off is through this ETN, which is a basket of short-term VIX futures. The ETF is correlated to the SPY-.87, meaning it's nearly a perfect hedge to the index. Thus, hedging a stock position with the VXX, here, looks like a good trade. After all, stocks are down sharply from their highs, and so some might want to start nibbling at current levels. Doing so with a hedge such as the VXX will allow investors to feel comfortable in buying at these levels.
As the chart at the bottom of the page shows, the recent sell-off in stocks has not been small. 100 points in the S&P is a lot. However one can foresee a sequence of events in Europe that leads to stocks sliding even lower. Remember when oil fell from about $113 to $78? Oil prices are largely dependent on global demand, as supply is rather constant. With prices sitting just above $90, there is still downside risk. Using the DNO (NYSE: DNO), the U.S. short oil ETF, investors can catch this slide in price. With continuing weakness in Europe, a slowdown in China and stagnating U.S. growth, it's hard to see oil going much higher, so buying DNO seems reasonable.
Lastly, look at the UUP (NYSE: UUP), which is the Proshares bullish U.S. dollar index ETF. Investors will flock to the safety of the dollar during a sell-off, so look at UUP as an alternative to bonds. As Europe deteriorates, the Euro will weaken, which will help the underlying index. Also, the Bank of Japan is doing everything in its power to weaken the Yen. All in all, the dollar looks set to rally, and by buying UUP, investors can catch this flight to safety.
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