Risk off ETFs to add as a hedge to your Portfolio

Since Brexit caught many of us; including numerous asset managers, financial advisors, investors and traders off guard. We have decided to talk about certain ETFs that will add value to your overall portfolio (diversification benefits) given a negative correlation with the overall stock market indexes.

Given a well diversified portfolio must have a small percentage of the overall portfolio that is negatively correlated with the overall stock market, we have previewed certain assets that have performed well over the last year. Specifically, we feature this risk off ETFs that one can find in our ETFHeatMap database/ screener tool:

  • GDXJ – Market Vectors Junior Gold Miners (130% – 1 Year Performance)

  • TLT – Ishares 20 + Year Treasury Bond (17% – 1 Year Performance)

  • YCL – Proshares Ultra Yen (32% – 1 Year Performance)

There has been a rush back into the safety and one of the assets that has greatly benefited from the uncertainty has been gold. Gold has increased from approximately $1,100 at the start of the year to approximately $1,330 at the current moment. The junior miners in the gold space have greatly benefited as evidenced by GDXJ. Specifically, it has exposure to small-cap miners that are in exploratory or early development phase (high risk but potential for high growth and merger and acquisition activity). GDXJ’s gross expense ratio is approximately 0.56% per annum and its top three holdings are B2Gold Corp, Alamos Gold Inc. and First Majestic Silver Corp.

Given the low yield environment globally, this risk free asset has performed exceptionally well as the world’s central banks keep down the yield curve. The negative interest rate policy being implemented by the central banks has caused investors to reach for yield while still maintaining adequate exposure to riskless asset. As expected, TLT has done well during volatile and uncertain times and has produced approximately 20% over the last year. It has an expense ratio of 0.15% and its top three holdings have a weighted average coupon of approximately 2.98%.

The global uncertainty has also greatly helped the yen which has strengthened over the past six months. The negative interest rates implemented by major central banks, especially Japan, have had a negative effect and has caused the yen to appreciate. The yen has increased especially against the US dollar over the last year. Proshares Ultra Yen, YCL, has an expense ratio of approximately 0.95% and holds Yen/US dollar forward contracts. Of note, a potential investor must be aware than this ETF is leveraged 2x.


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