If you are like most investors who hold a diversified portfolio of stocks, chances are that you hold one of a wide variety of index funds.
Maybe you’re invested in a broad market mutual fund, or perhaps you hold ETFs that provide you exposure to the S&P 500, Dow Jones, Nasdaq 100, or even the Russell 2000.
With interest rates hovering at historically low levels, you might be wondering, as with every investor, how much longer interest rates can remain so low.
As you probably experienced toward the end of 2018, interest rate concerns played a significant role in feeding the volatility that roiled the markets.
Ultimately, investors worldwide are concerned about the next bear market leading into the next recession.
Most investors fall into the temptation of selling a good chunk of their portfolio during a market bear cycle.
Not only does might this go against their long-term investment goals, selling during a bear has caused many an investor to miss the next bull market cycle, as both bears and bulls often move inconspicuously, making them difficult to identify, and making it too easy for investors to miss the boat.
Before You Sell Your Shares, Consider Hedging Them First
Many investors who hold index ETFs or mutual funds believe that the only direct protection against a market decline is to sell their shares.
Although you cannot go “short” ETFs that you hold or short mutual funds at all doesn’t mean that you cannot “lock-in” their current value through a declining cycle.
You can hedge your equities positions through the futures market, via index futures contracts.
In the past this has been difficult for many retail investors as index futures typically have held values beyond the smaller holdings of most investors.
But starting on May 6, the CME Group is launching Micro Emini Futures Contracts for the S&P 500, Dow Jones Industrial Index, Nasdaq 100, and Russell 2000.
These new products provide investors a tenth of the exposure that the standard emini contracts provide.
- S&P 500 = $5 x index value
- Dow Jones = $0.50 x index value
- Nasdaq 100 = $2 x index value
- Russell 2000 = $5 x index value
The dollar per tick value is $1.25 per contract for the S&P 500 and $0.50 per contract for the other three indices.
The opportunity here is that you can directly hedge your index ETF or mutual index fund exposure by matching the index with the micro futures and matching the dollar per tick value of the micro contracts to that of your ETFs.
As with every investment opportunity, there are, of course, caveats. Hedging has its risks. But it is an option to consider, one that may allow you to lock-in the value of your portfolio during a secular bear market.
To learn more about the new CME Micro Emini Futures, and whether such products might be right for your financial situation and investment goals, contact us at Halifax America.
The risk of loss in the trading of stocks, options, futures, forex, foreign equities, and bonds can be substantial and is not suitable for all investors. Trading on margin or the use of leverage is not suitable for all investors and losses exceeding your initial deposit is possible. Supporting documentation is available upon request. Trading futures, options on futures, and FX involves substantial risk of loss and is not suitable for all investors. Carefully consider whether trading is suitable for you in light of your circumstances, knowledge, and financial resources and only risk capital should be used. Opinions, market data, and recommendations are subject to change at any time. The lower the margin used the higher the leverage and therefore increases your risk. Past performance is not necessarily indicative of future results.