How ETFs can hedge portfolios against the Russia/Ukraine conflict
Investors worried about the impact of Russia’s invasion of Ukraine on financial markets could consider insulating portfolios with a range of exchange traded funds (ETFs), according to BetaShares.
David Bassanese, chief economist at BetaShares, said investors should expect continued volatility in the near term as the conflict continues and the international community hits Russia with sanctions, although he think it “shouldn’t significantly disrupt” the longer-term global economic and financial market outlook.
“The escalation of the situation in Ukraine has already caused an increase in the equity risk premium and, in turn, a market drawdown. More volatility seems likely in the days and weeks ahead, especially given the severity of the new sanctions imposed on Russia over the weekend,” he explained.
However, Bassanese highlighted several ways that investors could use ETFs to hedge their portfolios, along with products from the BetaShares range that could help with this. Money Management has also mentioned when there’s a similar ETF offered by another provider.
“The escalation of tension in the Ukraine has been accompanied by rising energy prices, and with the risk of Russian energy sanctions persisting, this could drive up oil and gas prices further,” he said.
Investors could therefore consider adding exposure to the price of crude oil futures and the energy sector is possible through ETFs such as BetaShares Crude Oil and BetaShares Global Energy Companies.
Between them, Russia and Ukraine account for one quarter of global grain exports so any disruption to this caused by the conflict could push up food prices, the economist continued.
This in turn could increase profits among food producers, so he pointed investors towards products like BetaShares Global Agriculture Companies ETF.
Gold would be another option for investors looking to protect their portfolios. The yellow metal has traditionally acted as a safe haven in times of market stress and rising inflation.
Bassanese highlighted the BetaShares Gold Bullion ETF but other gold ETFs available to Australian investors include ETFS Physical Gold ETF and Perth Mint Gold ETF.
Another potential safe haven is the US dollar, which could rise in the event of a global liquidity squeeze. He added that BetaShares US Dollar ETF and the BetaShares Strong US Dollar fund offer exposure to the greenback versus the Australian dollar; ETFS Enhanced USD Cash ETF could be another option.
“For those who fear a deeper equity market correction, and who may wish to hedge their equity positions against such an eventuality, other options are available through a range of short funds,” he continued.
“These funds are designed to generate returns that are negatively correlated to the returns of either the Australian or the US share market.”
Some funds that fulfil this aim include BetaShares Australian Equities Bear Hedge, BetaShares Australian Equities Strong Bear Hedge and BetaShares US Equities Strong Bear Hedge - Currency Hedged.
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