Risk levels are increasing and stock market volatility is expected to surge, caution some fund managers. While the Vix index, a measure of stock market turbulence, remains below its long-term average, history has shown that volatility can quickly disrupt the status quo. It’s possible that fund managers may warn of impending doom because they have a vested interest in these markets, showcasing their active management skills and attracting higher fees. However, empirical evidence suggests that active managers do not necessarily outperform the benchmark, particularly in turbulent markets.
In times of market concern, investors tend to gravitate towards more defensive strategies. Fortunately, within the realm of passive funds, especially exchange-traded funds (ETFs), there are innovative product ideas emerging.
Investing in equities with a focus on dividend-rich stocks, known as an “equity income” strategy, has shown promising results over the years. Dividends contribute significantly to total returns and offer stability compared to other forms of investment. WisdomTree Global Quality Dividend Growth UCITS ETF (ticker GGRG) and VanEck Morningstar Developed Markets Dividend Leaders UCITS ETF (ticker TDIV) are two notable options in this space.
Another strategy worth exploring is “covered call ETFs,” which have gained popularity among private investors in the US. These funds invest in mainstream indices such as the S&P 500 and generate additional income through call option premiums. This additional income helps smooth out returns and mitigate volatility. In the UK, Schroders and Global X offer covered call funds, while JPMorgan offers a successful ETF in the US.
To further diversify risk, buffer ETFs have been introduced, such as the Global X S&P 500 Quarterly Buffer UCITS ETF (SPQB LN). These ETFs offer investors upside potential within a specific cap while protecting against a portion of losses.
Lastly, bond-focused ETFs provide another defensive option. While specific bond ideas were not mentioned in the source article, they can be explored to further diversify risk and provide stable income streams.
In conclusion, as market volatility rises, investors can consider defensive strategies through various ETFs. These diverse options provide opportunities to protect against market turbulence, generate income, and potentially enhance risk-adjusted returns.
FAQs
1. Are active managers better at coping with turbulent markets?
Contrary to popular belief, there is no significant evidence suggesting that active managers outperform the benchmark during turbulent markets. Most active managers fail to beat the benchmark consistently.
2. How do dividend-rich stocks contribute to total returns?
Numerous studies have shown that dividends play a crucial role in total returns. Over the long term, dividends have contributed almost 30% to the annual total returns from major equity indices.
3. What are covered call ETFs?
Covered call ETFs invest in mainstream indices and generate additional income by selling call options on the underlying stocks. This income helps smoothen returns and mitigate volatility.
4. How do buffer ETFs protect against losses?
Buffer ETFs provide investors with upside potential within a specified cap while protecting against a portion of losses. For example, the Global X S&P 500 Quarterly Buffer UCITS ETF offers protection against the first 5% of losses each quarter.
Sources:
– Source article: [URL]
– “The Wisdom of Dividends” – Wisdom Tree: [URL]
– “Covered Call Strategies: The Power of Income Generation and Capital Appreciation” – Global X: [URL]
– “Buffer ETFs Explained: Investing in Market Uncertainty” – Global X: [URL]