ETFs to Hedge Market Weakness

The daily volatility in the stock market is not going to disappear anytime soon. Therefore, as investors we must have a few positions that hedge against the downswings, such as last week and today.

The beauty of ETFs is that they offer a variety of options when it comes to investing for down markets. There are inverse ETFs that move in the opposite direction of a chosen index. For example the ProShares Short S&P 500 ETF ($SH), which will gain 1% on a day the S&P loses 1%; and vice versa.

But for the investors that may not feel comfortable shorting the market there are other ETFs available that will either do well in a down market or much better than the overall action.

• Rydex CurrencyShares Japanese Yen ETF ($FXY) - The Japanese Yen has been a safe-haven investment for several years and other than an intervention by the Bank of Japan last month, the ETF has been moving steadily higher to all-time highs and is up again today.
• PowerShares US Dollar Index Bullish ETF ($UUP) - Stocks and the US Dollar have been moving in opposite directions lately. So to combat against a big down day there is the option of buying into an ETF that tracks the US Dollar Index to hedge a portfolio. Up today with the market lower.
• iShares Municipal Bond ETF ($MUB) - Even with bad press for over a year, which I have consistently disagreed with, the muni bond ETF remains a place for safety during market sell-offs. The distribution yield is currently 3.26% (tax-free). The taxable equivalent is approximately 5%.

**PFG currently owns positions in all 3 for various clients.