Displaying items by tag: hedging

(New York)

Rates look to be rising quickly. The economy is red hot and the Fed is hawkish, meaning two more rate hikes this year look very likely. With that in mind, investors need to protect themselves from rate risk. That means a lot of sources of income, like dividends stocks and bonds, could become sources of losses. However, fortunately there are numerous ETFs that can help investors earn income while protecting against losses. One such is Pimco’s 0-5 Year High Yield Corporate Bond (HYS). The ETF has a yield approaching 5% and has a duration of just over 2 years, putting it in the low duration category (meaning it has low rate risk).

FINSUM: This seems like a good option if you want to earn high rate-protected income. Given the current rate environment, funds like these should probably be a fixture of most portfolios.

(New York)

Call it euphoria, irrational exuberance, or a melt-up, everyone is looking for signs that market valuations are out of control and approaching a downfall. Some signs have finally started to show up in the last few months as stocks have steadily gained. One such sign can be seen across the market—the elimination of hedges. Consistently low volatility has reduced fear in investors’ hearts to the point that many are abandoning puts and other downside protections. They are trying to chase the performance of passives and don’t want to “waste” money on hedging. The chief market strategist at Cantor Fitzgerald comments on the trend that “I haven’t seen hedging activity this light since the end of the financial crisis … It started in late 2016 and accelerated in the second half of the year”.

FINSUM: This is typical late cycle imprudent behavior, but chasing benchmark performance is a good explanation of the trend.