How To Navigate Market Volatility: 5 ETFs That Strengthen Your Portfolio During Stock Turmoil

Author: Piero Cingari | August 05, 2024 12:22pm

Global equity markets have been under pressure in recent sessions amid fears of a potential U.S. recession, triggered by cooling labor market conditions and struggling manufacturing activity.

Despite last month’s business surveys showing expansion in services activity, investors remain worried that the world’s largest economy may be slowing down, which could curb U.S. household discretionary spending and reduce corporate profits.

Risky assets have been at the epicenter of the current market turmoil, as stocks worldwide experienced heavy declines.

• Over the past three sessions, Japan’s Nikkei 225 index plummeted by 19.5%, marking its worst three-day drop since the index’s inception in 1950.
• The Russell 2000 index, which tracks U.S. small-cap stocks, experienced a 10% decline during the same period.
• The Nasdaq 100, represented by the Invesco QQQ Trust (NASDAQ:QQQ), has seen a 12% drop from its all-time highs in July.
• The CBOE Volatility Index (VIX), often referred to as the market fear index, surged to briefly hit 60 points on Tuesday, its highest level since March 2020.

What Has Happened To Interest Rate Futures?

Recession fears, coupled with global equity market turmoil, have sparked wild speculation about Federal Reserve interest rate cuts.

A week ago, the market assigned only an 11.4% chance to a 50-basis-point rate cut in September, a probability that has now surged to 97.5%, according to the CME Group FedWatch tool.

Similarly, a week ago, the probability of year-end interest rates falling to 4-4.25% was zero, but as of Monday, it has rocketed to 72%.

Market-Implied Probabilities For Sept. 18’s Fed Meeting

Rate-cut event	Now*	1 Day Ago	1 Week Ago July 29, 2024
50bp to 4.75-5%	97.5%	74%	11.4%
25bp to 5-5.25%	2.5%	26%	88.2%

Market-Implied Probabilities For Dec. 18’s Fed Meeting

Year-end fed funds rate	Now*	1 Day Ago	1 Week Ago, July 29, 2024
4-4.25%	71.8%	66.8%	0.0%
4.25-4.5%	28.2%	33.2%	0.0%
4.5-4.75%	0.0%	0.0%	65.1%
4.75-5%	0.0%	0.0%	34.9%

Also Read: Goldman Sachs Raises US Recession Odds: Treasury Yields Tumble, Yen Rallies As Traders Bet On Heavy Fed Rate Cuts

5 ETFs Rallying On Global Market Turmoil

While global equity markets have experienced significant declines, safe-haven assets have maintained their status and effectively shielded investor portfolios from volatility.

Moreover, leveraged and inverse investment strategies on equity indices or stocks have also seen sharp rallies amid market selloffs.

Here are 5 exchange-traded funds (ETFs) that have rallied over the last few sessions:

• The Invesco CurrencyShares Japanese Yen Trust (NYSE:FXY) has been a significant beneficiary of the global market rout, as declining interest rate expectations in the United States have reduced the dollar’s “carry trade” advantage against the yen. Over the past four sessions, the FXY ETF has surged by 6.6%, marking its strongest rally since October 2008.
• The iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) has posted gains for eight consecutive sessions, surging over 3.1% last Friday as fears of a cooling U.S. labor market emerged.
• The ProShares Trust VIX Short-Term Futures ETF (NYSE:VIXY) skyrocketed by over 20% on Monday alone, and by nearly 66% over the last three sessions.
• The ProShares UltraPro Short QQQ (NASDAQ:SQQQ), which aims to achieve investment results equal to three times the inverse of the daily performance of the Nasdaq 100 index, has surged by over 23% in the past three sessions.
• The ProShares UltraPro Short Russell 2000 (NYSE:SRTY), designed to seek an investment performance equal to three times the inverse of the daily move of the Russell 2000 index, has rallied by nearly 33% in the last three sessions.

Chart: Inverse And Leveraged ETF Strategies on US Small Caps Spike Amid Market Turbulence

Image: Benzinga Pro

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Image created using artificial intelligence via Midjourney.

Posted In: FXY QQQ SQQQ SRTY TLT VIXY