As inflation concerns started to build up, U.S. stocks have started faltering this month. After notching the biggest one-day drop in its history on Monday, the Dow Jones witnessed violent swings in Tuesday’s trading session to post the biggest rally since January 2016.
Notably, the blue-chip index traded in a range of nearly 1,200 points, changing direction 29 times over the course of the session before surging in the final hour to close up 2.3%. This marks the second-biggest intraday trading range in the Dow’s history. This indicates heightened volatility in the stock market.
The CBOE Volatility Index (VIX), also known as the fear gauge, hits 50 for first time since 2015 on Tuesday before retreating to 30 at the close, which was still above its historic average. The index soared 115.6% on Monday — its biggest one-day jump on record. The fear gauge measures investors’ perception of the market’s risks and tends to rise when stock falls or investor panic starts to set in.
The initial sell-off in stocks was triggered by a sharp rise in U.S. bond yields late last week following the January jobs data, which shows wages increased at a faster rate since 2009. This has raised concerns over higher inflation that might force the Fed to adopt speedy rate hikes. Higher-than-expected rise in interest rates would lead to a rise in borrowing cost, thereby dulling the appeal for equities. Further, pick-up in economic growth across many developed and developing countries led to the prospect of an end to the cheap monetary policy era outside United States. All these are weighing heavily on the bull market, which is drawing closer to its ninth anniversary.
However, long-term equity fundamentals remain intact thanks to strong corporate earnings, higher consumer spending, rising consumer confidence as well as a new tax law enacted by President Donald Trump.
In order to exploit the encouraging trend amid volatility, investors should apply some hedge techniques to their equity portfolio. While there are a number of ways to do this, we have highlighted five volatility hedged ETFs that could prove beneficial amid market turbulence. Investors should note that these funds have the potential to stand out and might outperform the simple vanilla funds in case of rising volatility.
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