When markets become turbulent, defensive strategies come into focus. Investors can use ETFs to protect their portfolio from severe setbacks.
• Investing in uncertain times
• There are also suitable ETFs for cautious investors
• Wide range of investment options
From low-volatility ETFs to short/inverse ETFs, the capital market offers various instruments to spread the risk or to specifically bet against price losses.
Defensive stock selection: The minimum volatility principle
A common approach to risk control is so-called minimum volatility ETFs. Instead of reflecting an index based on market capitalization, these products specifically weight companies with historically low price fluctuations.
A prominent example is the iShares Edge MSCI Europe Minimum Volatility UCITS ETF. The issuer’s stated investment objective: “The fund aims to replicate the performance of an index consisting of selected European companies that have overall lower volatility characteristics than the broad European stock market.” The aim is to “minimize the ups and downs of the market”. Investors consciously aim to avoid extreme swings (volatility).
If you prefer to focus on the US market, the iShares Edge MSCI USA Minimum Volatility Advanced UCITS ETF might be suitable. Its investment focus: “Access the performance of a subset of equity securities from the US market that have a MinVol profile and a weighted average industry-adjusted ESG score improvement relative to the MSCI index.”
Gold as a safe haven – legal hurdles in Germany
Gold remains the classic crisis currency, especially in times of high inflation or geopolitical uncertainty. For investors, purchasing indirectly through exchange-traded products is often more efficient than physically purchasing bars.
The advantages that should be highlighted are the low costs and the tradability: the ETFs secured with physical gold reflect the spot price almost one-to-one. They are cheaper to manage and more liquid to trade than physical precious metals.
However, when it comes to regulation, there is an important difference between the financial centers. In Germany, the European UCITS guidelines prohibit ETFs that only contain a single underlying asset (such as gold) as sufficient diversification is required. German investors are therefore turning to gold ETCs. These exchange traded commodities also reflect the development of the gold price, but they are legal Bonds of the issuer – no fund shares. In Switzerland, on the other hand, pure gold ETFs that are physically deposited are permitted and widespread.
Aggressive hedging: profiting from falling prices
Short or inverse ETFs exist for tactical hedging, such as the Amundi ShortDax Daily or the Xtrackers ShortDAX Daily. The principle is a mirror image (inverse) to classic ETFs: If the underlying index falls by a certain percentage, the short ETF rises to the same extent.
Despite the chance of profits in bear markets, experts warn of the risks, according to extraETF. Since stock indices such as the DAX or the S&P 500 follow an upward trend in the long term, holding short positions over longer periods of time is usually loss-making. These products should therefore be understood as speculative tools for short time frames and are not suitable for long-term wealth creation.
Parking on the money market: The modern overnight money alternative
Money market ETFs have established themselves as a transparent and high-yield alternative to traditional bank deposits. As set out in the EU Money Market Regulation, you invest in short-term, highly liquid and high-quality money market instruments – i.e. short-term loans between banks, companies and states – with a term of a maximum of 397 days.
A heavyweight in this segment is the Xtrackers II EUR Overnight Rate Swap with a fund volume of around 20.02 billion euros. The ETF tracks the performance of a deposit that earns interest at the short-term euro interest rate (€STR). With a low flat fee of 0.10 percent pa, investors participate directly in interest rate changes without having to regularly search for new daily money offers. Since the income is retained, the capital grows continuously.
It depends on the type of investor
The choice of coverage depends on your individual risk tolerance. While money market ETFs offer stability, short instruments require active timing and a clear strategy.
Editorial team finanzen.net
This text is for informational purposes only and does not constitute an investment recommendation. finanzen.net GmbH excludes any claims for recourse.
Image sources: Who is Danny / Shutterstock.com, BEST-BACKGROUNDS / Shutterstock.com