Manage a Portfolio’s Risk Exposure with Geared ETFs

April 8th, 2015 at 3:17pm by Max Chen

As market conditions change, investors can utilize exchange traded funds that track alternative investment strategies to hedge risks or capitalize on potential opportunities.

On the recent webcast, Building Tactical Strategies to Combat Today’s Market Challenges, Mike Eschmann, managing director and co-head of capital markets & institutional strategy team for Direxion Investments, warned that with the equities markets near record highs and interest rates hovering near all-time lows, investors should be prepared their portfolios for sudden shifts by reducing risks.

For instance, Eschmann argues that managing duration – a measure of sensitivity of the price of a bond fund’s price to changes in interest rates – is very important as we face a rising interest rate environment. Bond funds with longer durations will exhibit a greater sensitivity to changes in interest rates. Looking at Treasury funds, Eschmann pointed out that if yields rose 1%, 5-year Treasuries could see returns diminish 4.67%, 10-year Treasuries could decline 8.49% and 30-year Treasuries could plunge 18.38%.

Consequently, investors can help diminish rate risk with an inverse leveraged Treasury bond ETF, such as the Direxion Daily 20-Year Treasury Bear 3X ETF (NYSEArca: TMV), which takes the -300% daily return of long-term Treasury bonds. Specifically, Eschmann points out that a 5% allocation to TMV reduces duration in half when investing in the Barclays AGG Index, Barclays 7-10 year Treasury Index and Morningstar International Bond. [Rate Hike Jitters Have Investors Fleeing Bond ETFs]

Matthew Tuttle, CEO & CIO of Tuttle Tactical Management, the manager behind the Tuttle Tactical Management U.S. Core Exchange-Traded-Fund (NasdaqGS: TUTT), also believes that leveraged and inverse ETFs can be used as a tactical allocation tool to better manage market exposure. For example, TUTT currently includes a position in Direxion Daily S&P 500 Bull 3X Shares (NYSEArca: SPXL).

“During times of high potential returns and low potential risk, leverage can increase returns… Inverse ETFs can tactically reduce net equity exposure during market downtrends,” Tuttle said.

Sharon Snow, CEO of Metropolitan Capital Strategies, also points out that leveraged strategies can help investors generate that extra “umph” for their portfolios. For example, Metropolitan Capital Strategies has juice returns in healthcare last year through the Direxion Daily Healthcare Bull 3x Shares (NYSEArca: CURE). The firm expects telecoms and tech to outperform and is looking into Direxion Daily Technology Bull 3X Shares (NYSEArca: TECL) to gain exposure. When the Fed begins hiking rates, Snow expects to add on positions in TMV. [Triple-Leveraged Biotech ETFs Could be Coming Soon]

Moreover, David Dziekanski, portfolio manager for Toroso Investments, has found that allocating in a tactical portfolio for a more short- and mid-term time frame helps investors adapt to changing market conditions.

Financial advisors who are interested in learning more about alternative strategies for a shifting market can listen to the webcast here on demand.