ETFs: What they are and how they can help investors with risk
* Updated 02/19/18
An exchange-traded fund (ETF) is a basket of securities that individual investors can purchase through a brokerage firm. It offers a more diverse portfolio without the complication and expense of buying multiple individual securities.
With the recent uptick in market volatility, many investors are seeking ways to avoid risk. A diverse portfolio can help with that.
There are dozens of ETFs available for a multitude of investment styles. They can be made up of stocks, bonds, commodities or other assets. They can be actively or passively managed.
According to Statista, the largest ETF companies in the U.S. by assets, in 2016, were BlackRock, Vanguard and State Street. The largest, BlackRock, had $969.4 billion in assets
Going into 2018, fund managers already expected an uptick in market volatility, with Wells Fargo Investment Institute reiterating its call following the recent market swings, saying, “We do expect more market volatility in 2018 than we experienced last year.”
Watching the Dow Jones Industrial Average swing between big gains is unnerving, but there is an opportunity to make holdings more diverse.
“This is an appropriate time to rebalance investments, to diversify holdings broadly and globally across all asset groups, and to capitalize upon improved equity-market valuations to add quality holdings to portfolios,” Wells Fargo Investment Institute said.
Sal Bruno, the chief investment officer at IndexIQ, gave FOX Business his take on the markets and the opportunities in ETFs for investors who are concerned about the recent change in the market.
At the end of 2017, it was Bruno’s perspective that the market was ripe for a 5%-10% correction.
With market volatility picking up, Bruno cited ETF options for investors who are concerned about the impact that volatility could have on their portfolios.
One option is the IQ Hedge Multi-Strategy Tracker ETF (QAI), which is designed to replicate the return of hedge funds and includes long/short equity, global macro, market neutral, event-driven, fixed income arbitrage and emerging markets.
Another ETF that Bruno said could help investors in a more volatile market is the merger arbitrage ETF (MNA). It holds long positions in target companies and short positions in sectors of acquirers that have announced a target acquisition.
When asked if there are ETFs that investors should avoid, Bruno mentioned directional ETFs.
“If this is short term, you will want an ETF that will still allow you to participate in the upside,”
Ben Phillips, chief investment officer of EventShares, told FOX Business that the consensus is that while there will be more market volatility in 2018, the underlying fundamentals of the economy are still strong.
EventShares has the actively managed Democratic Policies ETF (DEMS) and the Republican Policies Fund (GOP). According to Phillips, EventShares has the alternative to go short that they “are evaluating.”
DEMS is made up of holdings that are affected by the Democratic Party's political agenda, while GOP had holdings that react to the Republican Party’s agenda.
According to Phillips, both funds are structured to benefit from infrastructure spending, with the GOP fund having more exposure.
*Article updated to correct description of IQ Hedge Multi-Strategy Tracker ETF